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More on Bankruptcy for States--Skeel

I speculate a bit more as to what it might mean to have a bankruptcy law for states in this op-ed.  There seems to be a flurry of drafting activity going on, but no draft legislation has been released yet.  I'm hoping that will change shortly.


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Comments ( 1 )

The risk of default (credit risk) is built into the prices of state bonds. Currently, credit risk is low because, by law (and possibly according to the Constitution), states can not file for bankruptcy protection. Therefore, investors have a reasonable assurance of payment. Giving states the option to file for bankruptcy and default on their bonds, (as well as pensions to retirees), would quickly increase the returns (yields) demanded on state bonds and sink their prices. The effect of such an action would probably decrease yields and possibly introduce losses in money market yields (and other funds which invest heavily in state and municipal bonds). Funds which invest in state bonds are usually geared towards preserving liquidity and are viewed as a safe haven by investors. Introducing volatility to these funds could be catastrophic. Before allowing states to file bankruptcy, the government must, at a minimum, consider the effects on bond prices, money market funds, financial markets, our banking system, and the economy. I would expect our government to reassure investors before giving states the option to file.