“All but summoning the bond vigilantes”
Tuesday, May 17, 2016 - Posted by Rich Miller
* The final line in this story is “bond buyers everywhere can consider themselves forewarned”…
Illinois Governor Bruce Rauner is all but summoning the bond vigilantes. In an exclusive interview with Breakingviews, the onetime buyout baron challenged a pervasive belief in markets that governments can always just raise taxes to plug deficits. The issue resonates beyond his state’s $140 billion fiscal mess. From Springfield to San Juan, debt investors have neglected to focus political minds. […]
“We’ve spun ourselves into incredible debt, the worst debt in America for any state,” he said. “We can’t cut our way out. We can’t tax our way out. We’ve got to grow.”
The message should resonate not just with elected officials, whose financial neglect over many years loaded the state and its biggest city with debt, but also debt investors who have abetted government largesse in Illinois and beyond.
“There is an underlying assumption that in the end, you can always raise taxes. Let’s not sweat deficits too much, they’ll raise taxes eventually” Rauner said. “Bond buyers end up being advocates for tax hikes. That’s not the long-term solution.”
Detroit’s general obligation bondholders, for example, ultimately agreed to be paid less than par value for their holdings in the city’s bankruptcy proceedings. Allowing over-indebted governments in Illinois to restructure their debts could further shake the market from its complacency. Rauner said bond investors “might have to be thoughtful and actually do work, actually assess risk and reward.”
He’s absolutely right that we need lots more growth. But he sure doesn’t sound like a guy who’s trying to pass a massive tax hike. Maybe he should keep that in mind.
Also, too, if he ever attempts to pass a capital bill he’s gonna have to convince those investors to give us a decent rate. Dumping all over the state ain’t gonna help.
- TinyDancer(FKA Sue) - Tuesday, May 17, 16 @ 3:13 pm:
The governor - our very own economic hit man.
- MOON - Tuesday, May 17, 16 @ 3:17 pm:
Rauner is starting to remind me of Trump.
Forever putting his foot in his mouth,
- Honeybear - Tuesday, May 17, 16 @ 3:17 pm:
Grow by using his incredible Department of Commerce and Economic Opportunity! They’ve achieved so many….so many….well….BUT the ILBEDC will be great! Once it get’s it’s 501c3 status they’ll really move quick! (psssst…hey ILBEDC. You’ve got problems there. Check the IRS rules for the formation of a Economic Development Corp. Hint. You can’t do it with out statutory/legislative authority. But you go right ahead and act like it anyway. You all grown!)
- Michelle Flaherty - Tuesday, May 17, 16 @ 3:20 pm:
Entire story is a vehicle for the “From Springfield to San Juan” line.
- Formerly Known As... - Tuesday, May 17, 16 @ 3:24 pm:
==beyond his state’s $140 billion fiscal mess==
Feels like just yesterday it was ==only== $110 Bill.
- ejhickey - Tuesday, May 17, 16 @ 3:26 pm:
Illinois has not really tried to raise taxes very high. I say give it a shot . let’s try taxing our way out this and see what happens. Double the income tax and add retirement income to the mix and then try real hard to use the extra money to pay down the debt. What’s the worse that could happen?
- illini97 - Tuesday, May 17, 16 @ 3:27 pm:
“We can’t cut our way out. We can’t tax our way out. We’ve got to grow.”
There you go. That’s what the Governor’s year and a half on the job has taught him.
Will 1.4% be enough growth?
- Anon221 - Tuesday, May 17, 16 @ 3:31 pm:
Yah know, too much fertilizer burns the crop. Rauner needs to stop piling it on.
- Anonymous - Tuesday, May 17, 16 @ 3:32 pm:
There’s a world of difference between Detroit or any city and the full faith and credit bonds of a state and the investors know that
- Juvenal - Tuesday, May 17, 16 @ 3:32 pm:
1. This governor has no intention of passing a tax hike. The impasse is a feature, not a bug.
2. There will be no capital bill. See number 1.
- PlayK8 - Tuesday, May 17, 16 @ 3:33 pm:
What as a Venture Capitalist has Rauner ever “grown”? Slash, burn and sell what is left is his M.O.
- 47th Ward - Tuesday, May 17, 16 @ 3:36 pm:
===“There is an underlying assumption that in the end, you can always raise taxes. Let’s not sweat deficits too much, they’ll raise taxes eventually”===
Illinois cut its income tax in January of 2015. Does anyone else remember that?
- Qui Tam - Tuesday, May 17, 16 @ 3:41 pm:
Is growth really the answer? The voters of our state have historically rejected paying for more for anything, even though we continued to grow. What has the growth of the state been over the decades that massive debt piled up.
Maybe we need a state right-sized to what voters want to pay for, which would be a much less populous state.
- RNUG - Tuesday, May 17, 16 @ 3:42 pm:
== But he sure doesn’t sound like a guy who’s trying to pass a massive tax hike. ==
Nope. He sounds like someone getting ready for a distressed short sale. Or someone getting ready to make some money on a point spread.
- not so simple - Tuesday, May 17, 16 @ 3:44 pm:
So now it’s Madigan, Democrats, Unions, and bond buyers who caused our malaise? Oh, and social service providers, professors and university administrators, and Chicagoans. But mostly unions. I guess he is going to teach us all a lesson. So believeth the man in the Carhart for he is the one with the power and the way.
- Me too - Tuesday, May 17, 16 @ 3:50 pm:
This all reminds me of the mortgage crisis. Securities sold at triple A ratings, then insured several times over, then it all collapsed. The people holding those swaps were the only group of Americans that came out of that well. Challenging the notion that our governments can always tax our way out? How would he do that I wonder? Perhaps, he’d refuse to raise taxes and keep spending at the levels of the 5% tax rate.
Or on a micro level, force CPS to a whole new level of insolvency. But that’s just me.
- Annonin' - Tuesday, May 17, 16 @ 3:50 pm:
Never forget BigBrain trash talkin’ CPS debt deal drove the interest rate UP several points guessin’ that was a sweet deal for his Wall Street pals. Who cleans up today?
- Omega Man - Tuesday, May 17, 16 @ 3:52 pm:
Rauner’s response to the deep hole that we have dug for ourselves is twofold. Start digging twice as fast and blame it all on the other poor souls in there with you.
- the Other Anonymous - Tuesday, May 17, 16 @ 4:01 pm:
Yes, but there are very few things that a state can do to “grow” economically, and even fewer that are short term.
I have yet to see Rauner supporting any plan for economic growth. He supports plans to cut wages, but that’s a plan to grow profits.
If a state really wants to grow the economy, it actually has to start investing in infrastructure and education — i.e., spend money. And that means raise taxes to have the money to spend.
Now, if a state just wants to let companies earn higher profits, that’s a whole different story.
- cdog - Tuesday, May 17, 16 @ 4:01 pm:
Talk up the bond rate. (win)
Buy the swap (CDS) and help along the prophesied default. (BIG WIN)
Sure wonder who is trading in those ……
- Norseman - Tuesday, May 17, 16 @ 4:16 pm:
With a leader like Rauner, we don’t need others to trash our state.
- Anonymous - Tuesday, May 17, 16 @ 4:21 pm:
Yea raise taxes big time, and tax retirees. Then watch business, workers, and retirees leave the state in mass numbers. Sure that will help!
- Formerly Known As... - Tuesday, May 17, 16 @ 4:23 pm:
==Madigan, Democrats, Unions, and bond buyers who caused our malaise==
Unfunded pension liabilities increased from $15 Bill FY00 to $105 Bill in 2014.
Illinois is also spending $1.5 Bill this year on debt service for the pension obligation bonds sold in 03, 10 and 2011. That is not the only cause of our =malaise=, but it is not helping either.
- LIberty - Tuesday, May 17, 16 @ 4:28 pm:
Sounds like bankruptcy reorganization.
- illinois manufacturer - Tuesday, May 17, 16 @ 4:42 pm:
Total debt of 140 billion in a 600 billion economy . Not ability to pay but willingness and that is what hurts ourcrating and will do don’t count on a capital Bill until he is long long gone.
- Chicago 20 - Tuesday, May 17, 16 @ 4:52 pm:
The greater the point spread the greater the profit.
The greater the point spread the more likely for refinancing the same debt again and again.
Rinse, lather, repeat.
- illinois manufacturer - Tuesday, May 17, 16 @ 5:01 pm:
Can he get in trouble if he us trading or shorting the bonds? Congress is exempt are govoners,
- Anon221 - Tuesday, May 17, 16 @ 5:02 pm:
RNUG and cdog + 1
Follow the money. Follow the money.
- TinyDancer(AKA Sue) - Tuesday, May 17, 16 @ 5:21 pm:
Gotta park that cash SOMEWHERE.
Let’s see….
2 year treasuries @ 0.79
10 year treasuries @ 1.75
30-year treasuries @ 2.60
Illinois munis @ 7.5?
- AC - Tuesday, May 17, 16 @ 6:02 pm:
==Dumping all over the state ain’t gonna help==
…bonds, attracting business, tourism, economic growth, politically, or in any way, really. A good Governor is a great cheerleader for the state.
- BK Bro - Tuesday, May 17, 16 @ 6:14 pm:
If the current trend continues it’d be interesting to see the courts sort out (way down the road). Bond holders show up and say the State is legally obligated to pay them. Pensioners show up and say the same thing. Not enough money to pay both. Judge scratches head.
- burbanite - Tuesday, May 17, 16 @ 6:34 pm:
The first time I heard Bush invoke the R word (recession) I screamed. I knew the effect that word coming out of the presidents mouth would have. I believe the Gov understands exactly what he is doing. And what he had to pay before will look like easy street. Ugh
- @MisterJayEm - Tuesday, May 17, 16 @ 7:46 pm:
Why does Mike Madigan make the governor say such things?
– MrJM
- cannon649 - Tuesday, May 17, 16 @ 8:19 pm:
Illini Munis @ 7.5% I would not buy them and neither are many others.
Fire all these people - and stop trying to blame it all on the fact that the temporary tax was only temporary. The reason that the MJM could not sell it to the taxpayer.
- illinois manufacturer - Tuesday, May 17, 16 @ 8:40 pm:
I would buy them.
- Property of IDOC - Tuesday, May 17, 16 @ 9:03 pm:
It’s the same plan he had when he intentionally caused this financial crisis, when he didn’t fund colleges, when he didn’t fund social services, when he turned a blind eye to personal suffering of thousands…LEVERAGE,
- Anonymous - Tuesday, May 17, 16 @ 11:02 pm:
Just look at Rauner’s record in corporate America. Buy a company, loot its assets, give himself a bonus and as the money is going, going gone, sell the company.
Or in the case of long term care…. cut staff, cut cost… h@ll, these folks are going to die anyway.
Early Merry Christmas Bruce.
- BeenThereB4 - Wednesday, May 18, 16 @ 8:17 am:
== if he ever attempts to pass a capital bill he’s gonna have to convince those investors to give us a decent rate. Dumping all over the state ain’t gonna help. ==
Maybe his goal is not to make things better for Illinois.
Increasing the problem increases his leverage, and he has proven really adapt at increasing the problem/leverage.
- cdog - Wednesday, May 18, 16 @ 8:52 am:
“Detroit’s general obligation bondholders, for example, ultimately agreed to be paid less than par value for their holdings in the city’s bankruptcy proceedings.”
Did this reduced payout re the Detroit GO bonds trigger any CDS insurance payouts?
- TinyDancer(FKA Sue) - Wednesday, May 18, 16 @ 9:55 am:
=Illini Munis @ 7.5% I would not buy them and neither are many others.=
You would if you had a few billion laying around, searching for yield and relative safety.