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State & Local Governments Going Under?

Fear continues to spread beyond just the subprime issues (from Bloomberg):

Auction Supply `Tsunami’ Portends Municipal Losses U.S. states and local governments may extend the worst slump in municipal bonds on record as they replace as much as $166 billion of auction-rate securities. California, Boston’s biggest hospital and Duke Energy Corp. are converting their bonds to other types of tax-exempt debt after auction failures drove rates as high as 20 percent. The potential supply equals almost 40 percent of the municipal securities sold last year, overwhelming a market that tumbled 4.9 percent last month, according to indexes maintained by Merrill Lynch & Co., which began compiling market data in 1989. Rates increased last month as investors shunned the securities on concern the insurers that guaranteed the debt may be downgraded, and as dealers refused to buy bonds that went unsold at auctions. The higher borrowing costs are squeezing states and towns just as slowing growth threatens to cut revenue…

State & local governments are in a totally different bind than the federal government. The federal government can turn on the printing presses (and recently has) in order to "create" more money to pay its obligations. State & local governments cannot. As property values decline and their tax base erodes, states & municipalities are also getting hit with higher resets on the bonds they have already issued. This is a double or triple whammy: There is less tax revenue coming in & debt obligations are increasing. Prediction: Either massively higher property taxes or more than a few states & municipalities will go bankrupt over the coming year.