Are individual states following Europe down into the debt crisis?

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.

5 responses to “Are individual states following Europe down into the debt crisis?

  1. It is my fond hope that the Federal Government will not completely abrogate the Constitution by using funds collected from solvent States to reduce the indebtedness of insolvent States. State debt is a matter for Citizens resident in the impacted State, and their elected and appointed officials, to resolve, and is not in any way a legitimate matter for the Federal Government or its Agencies.

    • Mark: Thank you for your comment. We are in agreement. And I thank you because your comment gives me an excuse for a short history lesson.

      After the American Revolution and after the Constitution, the federal government “assumed” the debt of the states. This was the famous dinner meeting between Hamilton and Jefferson. Hamilton got his Assumption and Jefferson got the capital in Virginia. But that situation was very different. The states had amassed all that debt fighting the British. Certain states saw more action than others and bore more of the cost. Yet, the benefits from Independence were national. So the assumption made sense then even though it was obviously unpopular among the more fiscally sound states.

      Today, certain states have amassed huge debts to fund their own programs. Illinois’s debt only benefits the citizens of that state and it makes little sense for the citizens of Texas or Wyoming or Alaska to bear the cost of Illinois’s fiscal irresponsibility.

  2. Pingback: Sovereign debt crisis spreading to first world countries. « The Path to Tyranny Blog

  3. Pingback: Sovereign debt crisis spreading to first world countries | Rabble Times

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