Outstanding debt issued by state and local governments in the US now runs at $2.8 trillion. With pension costs increasing, revenue streams reduced and state budget shortfalls at about $192 billion for the fiscal year 2010, doubts about the likelihood of municipal debt being paid off are increasingly being raised. In the markets’ view, the risk of default for Illinois and California debt against default is in line with Portugal or Ireland.
The concern is understandable, and echoed by such investors as Warren Buffett, who predicted “a terrible problem” for municipals bonds when he spoke in June this year at the Financial Crisis Inquiry Commission.
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