Arizona Bonds To Take Beating Thanks to Boycott?

You may not have heard of this, but not too long ago, Arizona took a rather bold step by declaring illegal immigrants to be, surprisingly, illegal in their state. It sounds a bit counterintuitive, I know, but apparently, Arizona's decision to put some teeth in Federal law by making the same thing Federal law finds illegal illegal in the state too is being taken with some dismay.

But will this controversy bring trouble for Arizona in the bond markets?

On the surface you might think this makes no sense--how does a state's policy affect their ability to repay loans? Well, it's somewhat of a Rube Goldberg conclusion but the logic makes a lot of sense. You start with a policy that a lot of Hispanic folk and the like see as deliberately biased against Hispanic folk and the like. Then, you take the next step and realize they're not going to want to go to a place that has a law in place they see as deliberately biased against them. If they don't go, they encourage others to not go likewise. A large number of people don't go to Arizona, the money they would have spent doesn't come with them, Arizona's tax picture suffers and boom! Their ability to borrow money is suddenly hindered as they're perceived as being less likely to pay it back.

Thus, they have to up their interest rates just to get people interested. Arizona's a good risk right now, holding Aa2 ranking, Moody's third highest ranking, but will it hold in light of all this? And even if travel DOES fall off, how much of it will be a function of the new law, and how much a function of a still damaged economy?

Considering that, in 2008, Arizona took in about a billion bucks in travel and tourism, this isn't small stakes we're talking about here. And according to Moody's, the new law has already had some detrimental effects on Arizona's income. It's just speculation, of course, to say how it will affect bond rates at this early stage of the game, but it'll only be a matter of time before speculation becomes truth...one way or the other.