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* Charles Stein and Martin Z Braun at Bloomberg…
Some of the top holders of Illinois debt aren’t bailing out, even as the state slides toward a junk bond rating. The reason? They say Illinois isn’t an economic basket case, just the victim of a political logjam that will one day be broken.
“Illinois’s problems are self-inflicted,” said Guy Davidson, director of municipal bonds at AllianceBernstein Holding LP, which owns about $550 million of the bonds. “They have the resources to pay their debt and we think they ultimately will.” […]
Like other money managers, [Peter Hayes, head of municipal bonds at BlackRock Inc.] sees Illinois as a state with a solid economy but serious political problems. “In that sense, it is very different from places like Detroit and Puerto Rico,” he said.
While Illinois has drawn comparisons to Puerto Rico, which collapsed into bankruptcy after the U.S. gave it legal power to escape from its debt, the differences are vast. Illinois’s bond debt is less than half the Caribbean island’s, even though the state’s population is more than three times as big.
Illinois’s $800 billion economy — more than 10 times the size of Puerto Rico’s — is growing, albeit slower than the rest of the nation. It has been adding jobs, sending its unemployment rate tumbling to 4.7 percent from more than 11 percent in the aftermath of the recession. State law requires the government to appropriate sufficient money to pay debt service and it can draw from all unrestricted funds to do so. Illinois has never defaulted.
* But the Illinois Policy Institute’s news service director sees it differently…
As in Puerto Rico, Illinois is in a fiscal death spiral because of decades of poor government.
“So, in the end, both chilly Illinois and tropical Puerto Rico have one really major thing in common — bad government,” the Investors Business Daily column concludes. “Both over-promised on welfare services, pensions and other government spending, then tried to raise taxes to pay for it. And both have been grossly mismanaged by people operating under the delusion that big government solves everything.”
Could bankruptcy be Illinois’ only hope? As in Puerto Rico, it would take an act of Congress for that to be an option. But, as far as the state has fallen, the remaining options for a fiscal recovery are limited.
posted by Rich Miller
Wednesday, Jun 7, 17 @ 9:32 am
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IL bonds are a great investment, why would anyone not want to hold them as an asset? IL politicians will always increase taxes and the tax payer will keep paying. If they stop paying the tax IL will get a bailout from D.C.
Comment by Rocky Rosi Wednesday, Jun 7, 17 @ 9:37 am
I’ll take the word of calculating profit seekers over the biased ideologues.
Comment by Telly Wednesday, Jun 7, 17 @ 9:38 am
Illinois could basically have no backlog right now. But it chooses to. Yeah, why would any investor except the absolutely most conservative investor not love IL bonds?! I doubt there could be any safer junk bonds!
Comment by Ducky LaMoore Wednesday, Jun 7, 17 @ 9:44 am
There’s no DC bailout in IL’s, or any state’s future.
Comment by Robert the 1st Wednesday, Jun 7, 17 @ 9:47 am
===Illinois’s bond debt is less than half the Caribbean island’s, even though the state’s population is more than three times as big.===
But, but… but… “because… Puerto Rico!”
Comment by Oswego Willy Wednesday, Jun 7, 17 @ 9:49 am
==…then tried to raise taxes to pay for it.==
What was your organization’s response to that?
BTW - When did “busting out” become SOP for fiscal conservatives?
Comment by Jocko Wednesday, Jun 7, 17 @ 9:49 am
== They say Illinois isn’t an economic basket case, just the victim of a political logjam that will one day be broken. ==
Unlike the South Park gnomes, profit is assured
1. Logjam IL politics
2. Buy IL bonds at high interest rates
3. Clear the logjam
4. PROFIT !!
Comment by Hamlet's Ghost Wednesday, Jun 7, 17 @ 9:50 am
Medical receivables were being purchased by outside parties (at a discount) up until January of this year. Now no one will buy them. That’s a strong market signal that the holders of medical receivables from the state will get the shaft.
Comment by Downstate Wednesday, Jun 7, 17 @ 9:52 am
The positive spin from Bloomberg is further evidence that they, like the ratings agencies, are controlled by Madigan. /S
Comment by AC Wednesday, Jun 7, 17 @ 9:53 am
– the remaining options for a fiscal recovery are limited.–
Yeah, it’s a real brain-teaser.
The state cut income taxes two years ago. A bankruptcy judge would fall off the bench from laughter at a claim that the state doesn’t have the ways and means to pay its bills.
Just tax income like far-right dreamboat Gov. Cheesehead up yonder and self-inflicted problem solved.
IPI and IBD are reactionary zealots masquerading as objective researchers. They begin with a desired conclusion to fit their political agenda and then backfill a bunch of half-truths and key omissions of fact to justify them.
AKA, partisan hacks.
Comment by wordslinger Wednesday, Jun 7, 17 @ 9:53 am
Gotta love Rauner funded, darkI money IPI. DopeyDuct must feel so proud that these stooges crank up every day. Money well spent
Comment by Annonin' Wednesday, Jun 7, 17 @ 10:04 am
Well of course they’re not going anywhere, at this point they’re just trying to keep their head and limbs inside until the bus stops moving
Old saying: owe the bank 1000: your problem.
Owe the bank 10 million: the bank’s problem
Comment by Puddintaine Wednesday, Jun 7, 17 @ 10:07 am
Pud, what is the bond holders “problem?” They’re all getting paid on time, in full, by law.
Two weeks ago, Citigroup issued a “strong buy” on Illinois debt.
Read again what the money boys said. They’re not selling (as they could), they’re buying.
Comment by wordslinger Wednesday, Jun 7, 17 @ 10:36 am
Some parties want Illinois to fail. Others want Illinois to continue to exist. Many outside groups have proposed solutions. A few want bankruptcy to happen to a state, and Illinois is one of those on the short list:
http://www.governing.com/gov-institute/voices/col-pension-debt-4-worst-states-to-retire.html
But, you should also follow the money. Who is profiting from this death spiral??? I would love to see the Rauners’ portfolios, both personal and trust. And Griffin. And Uihlein.
Comment by Anon221 Wednesday, Jun 7, 17 @ 10:37 am
The ship named Illinois has sailed. How can this state possibly recover? Raise taxes and more high income earners leave and fewer companies move here or expand here.
There are more and more takers every day, every week. What happens during the next downturn? Way too much debt, way too many do nothing politicians, way too many takers, too few people/businesses to support everything.
Comment by Anonymous Wednesday, Jun 7, 17 @ 10:40 am
As the courts said in recent pension ruling, this
“crisis” is self created . They said there are ways to address this debt. The politicians need to find the will to do so.
I guess it’s like quitting your job and then not understanding why you have no money.
Comment by AnonymousOne Wednesday, Jun 7, 17 @ 10:46 am
The money managers are spicing up their bond fund returns with a chunk of Illinois and other high yield municipal paper. Of course they will puff up Illinois lest their holders scamper, and their fees take a hit.
In the final analysis, isn’t the root problem of Illinois, Cook County, Chicago, Puerto Rico, Detroit, New Jersey, Kentucky, et al the politics? In other words: “Here’s your candy. Please vote for me. Don’t worry. We have it under control.”
Comment by Cook County Commoner Wednesday, Jun 7, 17 @ 10:49 am
IPI wants Illinois to fail. Easier to remake it into right-wing utopia then than if you actually balanced the budget through a sane mix of cuts and revenue.
Comment by Precinct Captain Wednesday, Jun 7, 17 @ 11:04 am
Another sound business decision
Comment by Rabid Wednesday, Jun 7, 17 @ 11:21 am
===IPI wants Illinois to fail===
In their dystopian fantasy, they hope to gain in bankruptcy court what they cannot gain at the ballot box. When you can’t win by playing under the rules, change the rule.
Comment by 47th Ward Wednesday, Jun 7, 17 @ 12:05 pm
Just pondering out a few things …
1. Since bond payments are made on time and are basically immune to the shenanigans in Springfield, what is the justification for the downgrades so deep? If the bankers are still issuing strong buys, why is there is a disconnect?
2. Does this mean that the TA items that are left would mean upgrading the bond status?
3. If there is another downgrade, doesn’t that mean that pension funds and other big institutional bond buyers have to divest? Will bankers still being issuing strong buys then? Seems like a downgrade would spark a massive sell-off and put a TON of money into the pockets of people who don’t have those kind of investing restrictions with very low risk.
Few thoughts for a Wednesday …
Comment by The Way I See It Wednesday, Jun 7, 17 @ 12:15 pm
@The Way I See It
1. The justifications are twofold. First, the longer you go without a budget, the higher the theoretical risk of nonpayment is. While it is currently unconstitutional for a state to seek bankruptcy protection, there have been instances (albeit in distant memory) where states simply stopped paying when they ran the debt up too high. This forced the banks to the table to “agree” to a discounted repayment. Theoretically, it isn’t unconstitutional if both sides agree to it. Now, could you argue some kind of constructive impairment of private contracts through this type of action? Dunno. Hopefully we never have to find out.
Second, bond ratings demonstrate the credit risk of the borrower on a going forward basis. We may have “no problem” paying what we owe now, but if we go borrow more, we’re at a higher risk for default at that point than we were when we made the previous issuance.
2. No. Absolutely not. The Turnaround Agenda debate after the past two years is like arguing over which curtains you should put in your living room while the house burns down. To keep the analogy going, BVR’s statewide tours are like going around the neighborhood saying that, if your family had agreed on the curtain color, you wouldn’t have had to burn the house down, but I digress.
3. It depends. An Institutional Investor will typically have some type of governing document with respect to the investments that they make. Some may say “if X instrument is downgraded beyond Y point, we are required to liquidate.” (Obviously much more legalese than that.) Others may say “We can’t buy a new offering of X if X is rated below Y, but if X’s rating falls below Y post-purchase, we aren’t obligated to sell.”
RE: Selloff. If there is a selloff, there will be even more money to be made, but it will shift from the institutional investors to hedge funds and PE sphere. Folks that don’t have the same restrictions on what they can invest in will buy the debt for nothing and sit on it until this sorts itself out, the house finally burns down, or they are required to negotiate a haircut. The real question is whether that was part of the grand plan, or if lining the pockets of your friends is just a pleasant side effect of burning the house down.
Comment by Back to the Mountains Wednesday, Jun 7, 17 @ 2:00 pm
In the industry this is called “talking your book”.
The money managers will be singing the praises of Illinois bonds until the millisecond they hit their sell button.
Comment by RF Guy Friday, Jun 16, 17 @ 7:31 am