Chicago Fed Calms Fear of Projected Municipal Bankruptcies

Despite predictions of widespread defaults and bankruptcies in the United States municipal market (worth approximately $2.9 trillion), the Federal Reserve Bank of Chicago’s recent report attempts to calm investor fears.

Richard Mattoon, senior economist and author of the report, acknowledges that municipalities are facing declining property values, decreased state aid and under-funded pensions. Yet Mattoon predicts a bright future for the municipal market: “[I]f history is any guide, few local governments will either default on their debt or end up in bankruptcy ,” the report said.

According to Mattoon, there are a multitude of alternatives available to the municipalities. Many Chicago bankruptcy attorneys agree and recommend that local governments begin tapping reserve funds and take immediate corrective budget actions.

The report comes as good news for investors, many of whom have been running from the municipal market since late last 2010. The fear of investing in this type of market was in part due to Meredith Whitney, a well-regarded Wall Street analyst, when she publicized predictions that 50 to 100 local governments would topple under their current indebtedness.

The Chicago Fed report projects that while local government debt levels have increased since 1999, “history suggests that municipal bond defaults are rare, even in the worst of times.” In fact, municipal defaults are down this year compared to last.

Worth noting is the fact that Chapter 9 municipal bankruptcy filings are not legal in some states. In states where the law allows Chapter 9 bankruptcies, they are quite rare; approximately 600 Chapter 9 petitions have been filed since 1934.

Benjamin Brand Services – Chicago Bankruptcy Lawyers

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