Manic moves in world markets continue today with euphoria this morning (so far at least) on news that Ireland may be accepting a bail out offer from the IMF and EU. The bailout comes with a lot of strings but if accepted would buy Ireland further time to restructure and slash spending. This will be painful to their growth in the near term, but should be better for the country in the long term.
Ireland is near the beginning of a long line here. Others on deck for emergency help include Portugal, Spain, Italy and the 39 US States who have gaping budget holes coming to the end of 2010. US Municipal bonds have been under extreme duress the past couple of weeks, with prices in a free fall. This is a big problem for Municipalities, States, their employees and inhabitants who are depending on social services. It is also a huge issue for pension funds who are heavily allocated to Municipal bonds. This Tech Ticker interview with financial analyst Chris Whalen explains the risks inherent:
“Nowhere has this collapse been more visible than California, which faces a massive $25 billion shortfall and red ink for as far as the eye can see.
After years in which every looming financial crisis has been met with a government bailout, you might think that the same solution awaits California, as well as all the other states that have huge obligations that they can't afford to meet.
Whalen says California will default on its debt–hammering all the pension funds and other investors who have loaded up on apparently safe state bonds. The state won't immediately default, Whalen says. It will start by issuing the same sort of IOUs that it issued to by itself time during its budget crisis last year. But, eventually, the debts will have to be restructured, and this will result in those who own California's bonds receiving less than 100 cents on the dollar.”
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