Credit crisis hits main street
Post Date: Sun, 24 Feb 2008 06:51:51 -0700
When Wilkes-Barre Mayor Thomas Leighton hears about the troubles afflicting bond insurer Ambac Financial Group, he worries whether his Pennsylvania city can renovate a blighted park or repair the sewer system....
http://money.cnn.com/rssclick/2008/02/20/news/comp...
Credit crisis hits main street (Abstract text format)
Taxpayers could suffer in bond market turmoil - Feb. 21, 2008
Home
Business News
Markets
Personal Finance
Retirement
Technology
Luxury
Small Business
Fortune
Video
My Portfolio
CNN.com
Companies
Economy
International
Corre ctions
Pre-market Trading
After-hours Trading
Winners/Losers/Actives
Bonds
Currencies
Commodi ties
World Markets
Money Magazine
Real Estate
Mutual Funds
Taxes
Ask the Expert
Money 101
Autos
Loan Center
Best Places to Live
Ask the Expert
Millionaires in the Making
Ultimate Guide to Retirement
Retirement Calculators
Best Funds
Ask the Mole
Best Places to Retire
Personal Tech
Big Tech Blog
Techland Blog
Sectors and Stocks
Fortune 500 Techs
Tech Talk
100 Best Places to Launch
Ultimate Resource Guide
Small Biz Makeovers
FSB 100
Ask & Answer
Fortune 500
Technology
Investing
Management
Rankings
Main
Creat e Portfolio
Edit Portfolio
Create Alerts
Edit Alerts
Credit crisis hits Main StreetBond market woes make municipal borrowing more expensive and that could mean higher taxes and fewer services.
EMAIL |
PRINT |
DIGG |
RSS
Subscribe to Companies
feed://rss.cnn.com/rss/money_news_companies.r ss
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS
(close)
By Tami Luhby, CNNMoney.com senior writerFebruary 21 2008: 11:38 AM ESTVideoMore video
The New York governor has given the bond insurers five days to solve their liquidity problems.
Play video
Road construction and other municipal services are threatened in towns across America as the credit crisis sends cost of borrowing through the roof.NEW YORK (CNNMoney.com) -- When Wilkes-Barre Mayor Thomas Leighton hears about the troubles afflicting bond insurer Ambac Financial Group, he worries whether his Pennsylvania city can renovate a blighted park or repair the sewer system.Wilkes-Barre, which suffers from a weak BBB credit rating, depends on bond insurance to issue municipal bonds at favorable rates. If Ambac were to lose its AAA rating and its credibility, it could mean higher taxes, fewer services and lost jobs for the people of Wilkes-Barre."Without affordable funding, projects don't get built, streets don't get repaved," Leighton said. "It affects the people driving on those roads and the people paving those roads."The credit crisis that began in the subprime mortgage market last year has now spread to municipal bonds. Governments and public authorities face steep increases in borrowing costs because investors are losing confidence in the credit markets and the companies that insure the debt.Public officials nationwide are now weighing whether to restructure their debt to lower rates - if they have good enough credit ratings - or to ride out the storm with the hope that investors will return. However, some are concerned they may have to raise taxes or cut services to balance their budgets. Problems with auction-rate securitiesIn recent weeks, many larger governments - and other credit issuers - have faced unexpected interest rate spikes when auctions of their debt drew no bidders. The interest rate on this debt is variable so it soared after the auctions failed. For example, the Port Authority of New York & New Jersey saw its interest rate skyrocket to 20%, up from 4%.One reason these auctions are failing is because much of the debt is backed by struggling bond insurers such as Ambac (ABK) and MBIA Inc. (MBI) About $1.5 trillion of municipal bonds - half of all municipal debt outstanding - is insured, according to the Federal Reserve.But several bond insurers are at risk of losing their AAA-rating - some already have - because of their exposure to securities related to subprime mortgages. Investors now fear that the insurers won't have enough capital to cover potential defaults of these securities so the guarantees are not worth much.This lack of faith in the bond insurers is wreaking particular havoc on smaller and weaker municipalities. Without trustworthy insurance, these governments must pay higher interest rates to lure investors. It could mean the difference between paying 4.5% on a bond backed by a solid insurer and 5.3% on a bond with no insurance, said John Mousseau, portfolio manager for Cumberland Advisors, a Vineland, N.J.-based money manager. That translates into an additional $700,000 in annual borrowing costs on a $100 million bond.Already, some governments and authorities are growing concerned. The Massachusetts Turnpike Authority, for instance, could have to raise tolls again because of increased borrowing costs, a spokesman said. It's now paying an additional $300,000 a month on $126.7 billion in interest because of a delay in refinancing the debt due to the bond market's volatility."The result of a destabilized bond insurance market is that some governments, already facing reduced income due to the slowing economy, will have higher borrowing costs," said New York Gov. Eliot Spitzer, testifying before Congress last week. "That means shifting funds from schools and police to pay interest."New York state is paying an additional $823,000 in weekly interest costs due to recent failed auctions, a state budget spokesman said. New York is looking to convert some or all of that debt to variable-rate demand bonds, which are not subject to auctions."If more money goes to interest expense, then less money goes elsewhere," said Joseph Fichera, chief executive of Saber Partners, a New York City-based financial consulting firm for governments and corporations. Governments "have to find it somewhere. Taxes or fees would have to go up to pay for any additional costs."Budgets already squeezedThis spike in borrowing costs comes at a time when governments can least afford it. Many are already facing a budget squeeze from the national economic downturn. The drop in housing prices and sales and increase in foreclosures mean they are taking in less revenue from transaction fees and property tax revenue. On top of that, the pullback in construction and consumer spending translates into fewer sales tax dollars.The lost revenue could total billions of dollars, according to the United States Conference of Mayors. The group sampled 10 states and estimated the total tax revenue loss at $6.6 billion. The hardest hit: California, which faces a loss of $3 billion in property taxes or nearly $1 billion in sales taxes and $39 million in real estate transfer taxes.All the trouble in the bond insurance industry has led some to question whether the guarantee is needed at all. The number of municipalities that default on their debt is miniscule - less than half of 1% over the past 100 years, according to Mousseau. But the municipal bond market is not as transparent as other fixed income arenas so the insurance makes it easier to sell."The question is if bond insurance is not there, can [governments] access the market at an affordable price," said Bart Hildreth, interim dean of the Barton School of Business at Wichita State University and editor-in-chief of the Municipal Finance Journal.Some experts argue that municipalities, particularly larger ones with strong credit ratings, don't need insurance to entice investors to buy their debt. Public officials should do a better job explaining their credit-worthiness and bond issuances to banks and buyers and skip the insurance, Fichera said."There's an over-reliance on insurance in the muni market," Fichera said. Cutting back on the use of bond insurance "could be better in the long run. It would force greater transparency." Finger pointing over bond insurer crisis Another day of uncertainty for bond insurers
More Company News
Intel issues another revenue warning
Stores to tell how horrible holiday was
Auto sales outlook: Running on empty
The Hot List100 best places to start a businessDiesel: The truck stops here 'You're working for gas now'
Top StoriesStocks knocked by recession fearsOil tumbles 12% on still-growing supplyAuto sales outlook: Running on empty$1.2T deficit loomsPricing in a jobs apocalypse
Photo Galleries
6 hot Macworld apps for business
While Apple had little new to announce at Macworld, the show's expo hall is filled with outside developers showing off innovative new apps. Here's our picks for 6 tools no Apple-loving small business should be without. More
2009: The forecast for entrepreneurs
Small companies ended 2008 with a laundry list of troubles, with sales slow, bank lending frozen, and health care and credit-card costs soaring. Here's what to expect in 2009 on 7 key issues. More
Autos: 2008 winners and losers
In a disastrous year for auto sales here's who came out on top and who got thrown under the wheels. More
/*
#moneySponsorBox {margin-bottom:15px;}
#moneySponsorBox .cnnmoneySponsorTitle {position: relative; top: 7px;left:4px;}
#moneySponsorBox #adContainer {border: 1px solid #999;padding:5px;}
#moneySponsorBox #adContainer iframe{margin:5px 0;}
*/
© 2009 Cable News Network. A Time Warner Company. All Rights Reserved.
Terms under which this service is provided to you. Privacy Policy
Home
Portfolio
Calculators
Contact Us
Newsletters
Podcasts
RSS
Mobile
Widgets
Press Center
Site Map
User Preferences
Advertise with Us
Magazine Customer Service
Download Fortune Lists
Reprints
Career Opportunities
Special Sections
Conferences
Business Leader Council
Live Quotes automatically refresh, but individual equities are delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET.* : Time reflects local markets trading time. † - Intraday data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. Disclaimer
Copyright © 2009 BigCharts.com Inc. All rights reserved. Please see our Terms of Use.MarketWatch, the MarketWatch logo, and BigCharts are registered trademarks of MarketWatch, Inc.Intraday data provided by Interactive Data Real-Time Services and subject to the Terms of Use.Intraday data is at least 20-minutes delayed. All times are ET.Historical, current end-of-day data, and splits data provided by Interactive Data Pricing and Reference Data.Fundamental data provided by Morningstar, Inc..SEC Filings data provided by Edgar Online Inc..Earnings data provided by FactSet CallStreet, LLC.
Home |
Contact Us |
Advertise with Us |
Corrections |
Career Opportunities |
Press Center |
Site Map
RSS |
Email Delivery |
Portfolio |
Podcasts |
Mobile |
Widgets |
User Preferences |
Special Sections
|
Magazine Customer Service |
Download Fortune Lists |
Reprints |
Conferences |
Business Leader Council
|
