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Market Perspective Summary

  • Municipal Bonds

Canary in the Coal Mine? 

Jefferson County Alabama Not a Likely Harbinger of Future Municipal Defaults

Senior Portfolio Manager
April 04, 2011

There have been a lot of dire predictions about impending municipal defaults over the past several months that have seriously frightened many investors. One prediction (made on national television*) was that 50 to 100 large cities and counties would default over the next 12 months—representing hundreds of billions of debt in default. Let’s look at the facts to date:

In the 15 weeks since that prediction there have been three defaults of local governments representing a total of $68 million. For the prediction of “hundreds of billions” to be correct there would have to be $5.4 billion in defaults per week for the remaining 37 weeks. This seems highly improbable, given that the most municipal defaults ever in a year were only $12 billion and that state and local government revenue collections are improving due to a stronger economy.

Nevertheless, with each default, clients ask: Is this the first of many; in other words, is this the canary in the coal mine? In our view, Jefferson County Alabama’s situation reflects a unique set of circumstances which have little or nothing to do with the ongoing fiscal problems of states and municipalities across the nation—and which in no way foreshadows future bankruptcies and/or defaults.

* “60 Minutes,” December 19th, 2010

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