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Capital Markets

Judgement day nears for the benighted states

US states and cities are facing a crisis. Budget shortfalls from declining tax revenues and increasing debt are becoming insurmountable. A swift end to the recession cannot be relied upon to solve their problems. Unless tough decisions are made, and soon, the crisis facing the states could make the ClubMed meltdown seem like a vacation. Helen Avery reports.

CONCERNS ABOUT THE financial health of sovereigns in Europe have crossed the Atlantic and are spiralling out of control. In the credit default swaps market, the annual cost of insuring $10 million in debt against default for Illinois and California at the end of August was in line with that for Portugal or Ireland. It is not surprising that fear is mounting. This fiscal year, 48 of the 50 US states face budget shortfalls. The total budget shortfall for the states in 2010 will be $192 billion. Unfunded pension liabilities of state and local government pension plans will be almost $1 trillion in 2011.

It is understandable that the market is becoming more concerned about the US states’ fiscal health than that of EU sovereigns. California’s GDP is $1.8 trillion – eight times the size of Greece’s. Twelve other US states have a larger GDP than Greece. Twenty US states have a larger GDP than Portugal. Fifteen have a larger GDP than Ireland.

But defaults are not the problem. Such figures being bandied about incense California treasurer Bill Lockyer.

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