Analyst Martin Weiss Says California Will Default on Municipal Bonds

Analyst Martin Weiss, who sounded an early warning bell on Bear Stearns and Lehman Bros, says that it is invevitable that California will default on its municipal bond obligations.

Analyst Martin Weiss, who sounded an early warning bell on Bear Stearns and Lehman Bros, says that it is invevitable that California will default on its municipal bond obligations. He believes that holders of California's debt should sell now because California has a $24 billion annual budget shortfall with no obvious way to close it.

According to a Fortune article:

"The state has appealed to Washington for a federal bailout, but it got a cool response from the Obama Administration. The next step is draconian cuts in state services and payroll, but Weiss says that will only deepen the "depression" in California, where the unemployment rate is 11.5%, by further cutting into tax revenue.

Asked to put odds on California defaulting on its $59 billion in outstanding general obligation bonds, Weiss doesn't hedge. "It's unavoidable," he tells Fortune."

A default by California would be catastrophic for several reasons.  First, California is the largest municipal bond issuer and its default would make Lehman Bros and GM look like an appetizer.  Hundreds of thousands of investors would take a hit. Second, it would undermine the multi-trillion dollar municipal bond market, making it harder for other states and municipalities to raise money and raising the borrowing costs.

While the Federal Government and President Obama have been cool to bailing out the most populous state in the Nation, they may not have much of a choice if push comes to shove.  Not only would the financial implications be catastrophic, but Obama and the Democrats could kiss-away the 55 electroral votes that come from the State.

Learn more about municipal bonds.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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