While the United States appears to be safe from the sovereign debt crisis hitting Europe, at least for now, individual states may be following Europe down the hole. In fact, some states may even be leading the way. According to Bloomberg:
Illinois capital-markets director John Sinsheimer and Citigroup Inc. bankers took a globe-girdling trip from the U.K. to China in June to persuade investors that the state’s $900 million of Build America Bonds were a bargain.
The seven-country visit worked. The state sold one-fifth of the federally subsidized securities abroad the next month, tapping investors who are the fastest-growing source of borrowed cash for U.S. municipalities. Illinois, with the lowest credit rating of any state from Moody’s Investors Service, dangled yields higher than Mexico, which defaulted on debt in 1982, and Portugal, which costs more to insure against missed payments.
Somehow, I didn’t see this story on the front page of the newspaper or on the evening news. As the whole world focuses “basket-case” countries like Portugal and Mexico, some of our own states have lower credit ratings and are paying higher interest rates as a result. Illinois is, of course, much smaller than Mexico but it’s about the same size as Portugal. The two are actually quite similar from a political-economic standpoint. Illinois is part of a larger union, the United States, while Portugal is part of the European Union. Neither controls is own currency and neither can devalue its currency to forestall default. It remains to be seen if the EU would bail out Portugal were it to face default and it also remains to be seen if the US would bail out Illinois or other states were it to be in the same situation.
I am not yet proposing that Illinois is as much of a risk to the global financial system as Portugal. But rating agencies and investors already see Illinois as more likely to default on its debt. Yet the media and politicians are covering up this story, pretending that things are good here in the US when they are far from.