We’re not Greece, Part 430
Thursday, Jul 15, 2010 - Posted by Rich Miller
* All the goofy hype notwithstanding, the state’s borrowing costs were actually lower than expected on yesterday’s bond offering. From the Wall Street Journal…
Illinois didn’t appear to have trouble attracting investors to a $900 million taxable municipal bond deal Wednesday, despite weak tax revenue, persistent fiscal woes and a yawning pension hole.
Investors bid up prices on the longest maturity part of the taxable Build America Bond deal, due in 2035, pushing down the risk premium to 325 basis points, or 3.25 percentage points, over the benchmark 30-year Treasury bond. Before the sale, the premium–the bonus investors demand to buy the bonds instead of extremely safe Treasurys–was forecast at 340 basis points, give or take 10 basis points.
Bond Buyer…
The municipal market was unchanged to slightly firmer yesterday, amid light to moderate secondary trading activity, as Illinois launched $900 million of taxable Build America Bonds in the primary and the municipal scale stayed below 4% on the long end.
* Sun-Times…
Sinsheimer estimated that the state paid an interest rate premium of 25 basis points, or 0.25 percentage points, because of its lower credit rating.
The difference would translate into additional interest payments of about $2.25 million a year.
Keep in mind that about a third of those borrowing costs are paid by the federal government.
* There was quite strong demand…
More than $2 billion in orders came in Wednesday for Illinois’ $900 million taxable Build America bond issue, a show of strong demand, said John Sinsheimer, the state’s director of capital markets. […]
The sale drew 93 investors, including 17 from overseas who bought about 29 percent of the issue.
“The fact that 17 highly sophisticated international investors made the decision that Illinois credit was worth their investment for the long term … is a true statement of their view of the creditworthiness of Illinois,” Sinsheimer said.
* Investors basically saw through all the hype. From the Financial Times…
“The farther we traveled away from all of the noise that is in the US market on Illinois, the more focused investors were on the strength of the state’s economy and the statutory support we give our bonds,” said John Sinsheimer, head of capital markets for Illinois.
A big selling point for Illinois was that its state constitution requires that it make bond payments before any other bills, including education, public safety and entitlements.
“The whole muni sector hangs under this sovereign cloud from Europe,” said Scott Minerd, chief investment officer at Guggenheim Partners, a US money manager who bought the Illinois bonds. “If you look at how secure you are in the Illinois deal [with the priority of payments], you can pick up some bonds that are relatively cheap basically because no one wants to own them right now. The time to buy securities like Illinois is when you are being paid to take the risk.”
* None of this means that Illinois doesn’t have serious problems. It does. But investors know that bonds are absolutely the first to be paid, and I’ll bet that many believed like Minerd does that they could let the crazy hype boost earnings on an otherwise strong investment, even at the lower payoff rate.
- John Bambenek - Thursday, Jul 15, 10 @ 2:14 pm:
Illinois isn’t Greece. But according to the latest risk ratings, it’s probably closer to Iceland.
- VanillaMan - Thursday, Jul 15, 10 @ 2:28 pm:
Greece Is The Word - Jacobs/Carey, enhanced by VanillaMan
We solve our problems but don’t see the light
We gotta stop spending, we gotta get it right
There is a danger we can go too far
If we stop believing just who we are
Greece is the word
They think our budget is just a growing pain
Why don’t they understand, it’s just a crying shame?
Their lips are lying only real is real
They’ll feel in November, what it is that we feel.
Greece is the word
Greece is the word, is the word that you heard
It lost it’s groove, and now has a new meaning
Greece is a people, who spent all their future
Greece is the way we are feeling
They spend our assets and they throw it away
Frugality belongs to yesterday
There is a chance that we have gone off a cliff
We vote out the incumbents who don’t know the diff
Greece is the word
Greece is the word, is the word that you heard
In the news as the blogs are screaming
Greece is the time, is the place is the motion
Greece today is completely unappealing
This is the life of illusion
Wrapped up in trouble laced with confusion
What we doing here?
We spent ours, our kids, and our grandkid’s pay
Government now lives from day to day
There is a chance that we can vote them out
We need to start seeing New Dealers pout.
Greece is the word
Greece is the word, is the word that you heard
On traditional or cable news recently
Greece is a symptom, of Big Government failing
Greece is the way we are feeling
Greece is the word, is the word that you heard
From ‘Frisco to Boston to Miami
Greece is our future, if we don’t stop wasting
Greece is the way we are feeling
Greece is the word
Is the word
Is the word
Is the word
Is the word
Is the word
Is the word
Is the word
Is the word
- wordslinger - Thursday, Jul 15, 10 @ 2:31 pm:
Gee whiz, don’t those investors know that we live in the darkest of times, our best years are behind us and the world (preferably with Mitch Daniels and Sarah Palin as Emperor and Empress) is passing us by?
You know what they say, money talks and something else walks.
This is going to make a lot of sad people on this blog even sadder.
- Cincinnatus - Thursday, Jul 15, 10 @ 2:35 pm:
Rich said,
“Keep in mind that about a third of those borrowing costs are paid by the federal government.”
This is precisely the problem. Illinois interest on debt is being partially financed by the Federal Government.
Two problems with this approach:
1. Taxpayers in fiscally responsible states are subsidizing Illinois profligate spending.
2. Bond purchasers may think that there is an implicit backing of the Feds since nobody believes that the Feds will allow Illinois to default on this debt.
Incessant interference in the market does nothing other than prolong resolution of the state’s problems since it allows ignorant lawmakers to continue spending (after all, we are getting favorable rates).
Without investors believing that they will be recouping their investments because of the implicit Fed backing, they should be worried about being “first to be paid.” Remember that bond holders got hosed in the GM and Chrysler bailouts. The Obama administration has no compunction about screwing secured bondholders in favor of unions. We saw it last year.
- Rich Miller - Thursday, Jul 15, 10 @ 2:40 pm:
===Bond purchasers may think===
No major bond buyer is gonna think that. Period. Which pretty much negates the rest of your comment.
- wordslinger - Thursday, Jul 15, 10 @ 2:45 pm:
That’s right Cincy, those yokel institutional bond buyers are little lambs about to be fleeced by that bad old Obama and, what? The Chicago Machine, maybe? The combine? The Fightin’ Illini?
Not many songs on your jukebox, brother.
And the last default by the SOI was when? Any default by any state was when?
- Former Bartender - Thursday, Jul 15, 10 @ 2:47 pm:
Cincinnatus - The federal subsidy on the bonds is in exchange for the Bonds being issued on a Taxable basis under the Build America Bond program. It is a rebate of 35% of interest payments instead of giving the bonds tax-exempt status to investors, there is not any federal guarantee from that act.
- Reality Check - Thursday, Jul 15, 10 @ 2:53 pm:
@Cincinnatus: I realize you are a right winger but I have not given up hope that you may still be susceptible to facts.
In that spirit, you may wish to know that Illinois ranks 43rd in state spending (GRF) as a share of its GDP - we are a large, wealthy state that spends little (in both relative and absolute terms) on public services.
Also, please acknowledge that GRF has been cut from $28 billion in FY09 to $26 billion in FY10 and less than $25 billion this year. That’s MORE THAN the 10% cut your darling Bill Brady was bleating for.
Time to raise revenue. Now.
- Downstater - Thursday, Jul 15, 10 @ 2:53 pm:
Want a sense of how Illinois ranks? Look no further than the pricing of Credit Default Swaps. This is the “insurance” instrument that is priced to individuals that want to insure against the default of an issuing entity (corporation or state) for their financial instrument (bonds, etc.).
The higher the CDS spread, the higher the cost of insurance (ergo, the more nervous are investors about the financial instrument). Here are some states numbers:
Califorina 337
Illinois 360
Michigan 283
New York 272.
Illinois is seen as the riskiest financial state in the nation, by the financial markets.
How do we compare to overseas?
Well Greece is at 893 (more than double Illinois).
But Portugal is at 288, or 20% less risky than our great state.
Don’t let the politicians tell us our state is doing fine. The markets are warning us - loud and clear!
(Source - Federal Reserve Bank of St. Louis.)
- Rich Miller - Thursday, Jul 15, 10 @ 2:56 pm:
Downstater, the CDS prices for Illinois would be more valid if more than a tiny handful of CDSs were sold. It’s based on a very small number, and, therefore, not really valid.
- Not a banker but... - Thursday, Jul 15, 10 @ 2:57 pm:
There is no plan to actually pay any of this back and that is the problem. There also is no plan to pay back the $1 billion + of interfund borrowing that is about to take place either.
There also is no real attempt being made to reduce spending except by cosmetic items.
Quinn and Vaught are beyond fiscally irresponsible and I think that will be the major reason why the electorate will choose someone else. We simply cannot afford them anymore.
- wordslinger - Thursday, Jul 15, 10 @ 2:58 pm:
Downstater, the market set Illinois’ borrowing rate yesterday, straight up. Swaps are just another game in the financial casino to keep the get-rich-quick chumps buying and selling.
- Cincinnatus - Thursday, Jul 15, 10 @ 2:59 pm:
Yeah, you guys are right. The program is nothing but peaches and cream:
http://www.cnbc.com/id/37729263/
Any chance that the money is earmarked to infrastructure like it is supposed to be, or just being used to cover operating expenses?
- Cincinnatus - Thursday, Jul 15, 10 @ 3:18 pm:
One other point to make, many traders are instructing how and recommend to their clients to hedge these instruments.
- Cincinnatus - Thursday, Jul 15, 10 @ 3:28 pm:
And I’d like to hear anyone give me some rational argument answering my first point, above…
- Vote Quimby! - Thursday, Jul 15, 10 @ 3:30 pm:
What are the odds bondholders have to go to court to enforce the Constitutional provisions?
- cassandra - Thursday, Jul 15, 10 @ 3:33 pm:
Unlikely that Illinois will lower its income tax so when the bondholders cash out, as first in line, the money will be there, barring an economic collapse so catastrophic that we can all head for the hills.
It’s the rest of us, not the bondholders, who should be worried. When Pat Quinn finishes paying the bondholders, giving big raises to state employees represented by organized labor (new contract coming up in 2012), expanding the upper level Democratic patronage army and increasing their salaries (like he just did-but only the beginning) who will be left to hit up for more cash–lots more. Pensions? The judge will say no.
Salaries? The unions are big political contributors and they’ll howl. So Mr. and Mrs. Middle Class will be stuck with the tab.
- Objective Dem - Thursday, Jul 15, 10 @ 3:39 pm:
U.S. News and World Report has an interesting chart on the impact of tax increases and budget cuts by state.
http://money.usnews.com/money/blogs/flowchart/2010/7/9/a-state-by-state-pain-index.html
- John Bambenek - Thursday, Jul 15, 10 @ 3:47 pm:
What are the odds bondholders have to go to court to enforce the Constitutional provisions?
Zero.
Politicians know which side their bread is buttered on. They threw the unions right under the bus because the bond houses went “boo!”.
- Living in Oklahoma - Thursday, Jul 15, 10 @ 3:49 pm:
I wish I still cared about Illinois. Greece or not, the place is done. Fat lady is singing, ship is sailing, call off the dogs and throw a blanket on the fire. We are a laughing stock and there is no political will to fix any of this.
- Cincinnatus - Thursday, Jul 15, 10 @ 3:49 pm:
Objective Dan,
That’s a weird chart and I think it’s misleading
If a state doesn’t raise taxes, and cuts spending, the “pain” index is positive, and the more a state cuts, the higher the pain index. So putting a state on firmer financial footing results in a higher pain index. Note that Illinois has a negative pain index. Is the pain per taxpayer better or worse, all things considered?
- The REAL Anonymous fka Anonymous - Thursday, Jul 15, 10 @ 3:50 pm:
Bravo, V-Man! Bravo! *holds up lit lighter*
- Objective Dem - Thursday, Jul 15, 10 @ 4:44 pm:
Cincinnatus, I don’t think the chart I linked to is great or that sophisticated, but it does give a basic sense of how much states are raising taxes and/or cutting services.
The basic idea of the chart is to show how much “pain” people are in due to tax increases or service cuts. It doesn’t directly relate to fiscal stability or a sound budget. But it relates indirectly because it shows if a state has taken actions to address budget problems, i.e. raised taxes or cut services. No surprise but Illinois is the 42nd state on the list. The “New Taxes Per Person Since 2009″ went up $17 but “Spending Cuts Per Person Since 2009″ was a negative $71 because our spending went up. This indicates to me that Illinois is not taking steps to balance the budget like other states.
- Cincinnatus - Thursday, Jul 15, 10 @ 5:34 pm:
OD,
Oh, I understand how to read the chart. I think it is horribly misleading. Positive (more) pain is actually good for a state! Just a very strange way to create a chart, I don’t understand why someone would use this methodology, especially in light of your understanding that it really doesn’t provide any insight into the “condition” of a state.
- nick - Thursday, Jul 15, 10 @ 6:22 pm:
Certainly like reading such positive view of our State’s situation.All the gloomy talk about us being in dire fiscal straits doesn’t make the mac and cheese go down easy
- CircularFiringSquad - Thursday, Jul 15, 10 @ 6:56 pm:
Cincy aka Moron aka NoTaxRushmore
The bonds sold cheap. Feds pay some interest because the buyers PAY TAXES. THAT IS WHAT TAXABLE MEANS Cincy.
Should we all type s l o w e r? OR LOUDER?
End of debate.
CDS are just a white collar swindle that should b outlawed.
Go back to explaning how we should cut the minimum wage and deny women equal pay for equal work.
BTW while you are at how is that Michael Steal at GOP Day invite coming
It would be special!
Another Day ends and NoTaxRushmore + Daddy’s Lil Deduction are still running behind.
Perhaps a buscapade with CommandoMakeItUp.
Capt Fax loves those.,
- steve schnorf - Thursday, Jul 15, 10 @ 7:24 pm:
As I have been saying for years, uninsured against uninsured, the riskiest FF&C state bond is far less risky than the highest rated corporate bonds. In spite of all the teeth gnashing by the media and people on here and other blogs, there weren’t, and won’t be, any shortage of institutional buyers for Illinois FF&C bonds.