House Budget Chief Ryan Says Republicans Won't Bail Out States in Default

http://www.bloomberg.com/news/2011-01-06/house-budget-panel-s-ryan-says-republicans-won-t-save-states-from-defaults.html

              By Simone Baribeau and James Rowley -              

Jan 7, 2011 12:01 AM ET

 

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     Jan. 6 (Bloomberg) -- House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, talks about U.S. government spending and the debt ceiling.      Treasury Secretary Timothy F. Geithner says lawmakers must raise the federal borrowing limit in the first quarter of 2011 or risk a default on U.S. debt and a loss of access to global credit markets. Ryan talks with Peter Cook on Bloomberg Television's "Bottom Line." Bloomberg's Mark Crumpton also speaks. (Source: Bloomberg)

Congressman Paul Ryan, the BudgetCommittee chairman in the U.S. House of Representatives, saidRepublicans don’t intend to save states from debt defaults.
“We are not interested in a bailout,” the Republican fromWisconsin said yesterday in Washington. Ryan said some statesare “already telling us” that, when asked how he would respondif he was told one was in danger of defaulting.
U.S. states face a combined $140 billion in deficits in thenext fiscal year, the Washington-based Center on Budget andPolicy Priorities said Dec. 16. State tax collections remainbelow pre-recession levels, according to the Nelson A.Rockefeller Institute of Government in Albany, New York. Nostate has defaulted on its debt since Arkansas did in 1933.
“Should taxpayers in frugal states be bailing outtaxpayers in profligate states?” Ryan asked during a forum nearthe Capitol. “Should taxpayers in Indiana, who have paid theirbills on time, who have done their job fiscally, be bailing outCalifornians, who haven’t? No, that’s a moral hazard we are notinterested in creating.”
While negative budget news likely will mount as most statesnear the July 1 start of a new fiscal year, Wells Fargo & Co.said yesterday that “the potential for credit default is lowoverall and varies widely.”
Go It Alone
“We expect state and local governments to wrestle withtheir fiscal problems on their own without help from the federalgovernment,” said Natalie Cohen, a New York-based senioranalyst for the bank, in a report. She said 35 states haven’treported midyear deficits, while Illinois’s $13 billion gap is47 percent of its budget. In California, she said, the current-year imbalance amounts to 6.6 percent of the spending plan.
Moody’s Investors Service said yesterday in a report thatthis year won’t bring any defaults on state debt it rated. Therewere no defaults last year involving state and local securitiesit rated, the New York-based company said.
The U.S. government will face pressure before October tohelp states that have taken on too much debt, Meredith Whitney,the banking analyst who correctly forecast a Citigroup Inc.dividend cut in 2008, said in September. Last month, speaking onthe CBS show “60 Minutes,” she predicted defaults of more than$100 billion in local debt and said municipal finances posed“the largest threat to the U.S. economy” next to housing.
Wien’s Surprise
A major state won’t pay interest on a bond this year,“causing havoc” in the $2.86 trillion municipal-securitiesmarket, Blackstone Group LP’s Byron Wien said Jan. 3, withoutnaming the state. The default will occur “because of a lack offunds,” the chairman of the company’s advisory services unitsaid in a statement.
Republicans in the House aim to cut $60 billion in U.S.government spending, Ryan said yesterday at the forum sponsoredby the Manhattan Institute for Policy Research in New York andEconomic Policies for the 21st Century in Washington. Both arenonprofit groups engaged in public-policy research.
“If we bailed out one state, then all of the debt of allof the states is not just implied, it’s almost explicitly put onthe books of the federal government,” Ryan said. He said hewould call hearings to examine states’ fiscal situations and the“proper federal response” in the event of a default.
Kevin Seifert, a spokesman, declined to elaborate on Ryan’scomments about states that may be in danger of defaulting.
States can’t declare bankruptcy and need bond-market accessto fund infrastructure, so the possibility they would renege on“full and timely” debt service is “remote,” BlackRock Inc.analysts said in a Dec. 7 report. The New York-based company isthe world’s largest money manager with $3.45 trillion of assets.