Meredith Whitney: US towns and cities are still too indebted

published 24 March 2011

Controversial US investor Meredith Whitney is sticking by her claim that cash-strapped local authorities in America will default on "hundreds of billions of dollars" of their debt.

Whitney, who rose to fame pre-crisis by accurately predicting that US bank Citigroup would have to cut its dividend, made the 'muni (municipal) bond' call in December.

It attracted much criticism from other financial heavyweights, including 'bond king' Bill Gross, who claimed that she was exaggerating the problem. The record amount of municipal defaults in one year is around $8bn, rather than hundreds of billions.

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Yet Whitney remains adamant that disaster will come. 2011 "will see defaults You've got too many drains and demands on state revenue. I've never said that a state would default, but I think the local municipal bonds are at a significant risk of default."

She explained her rationale to high-profile journalist Maria Bartiromo in USA Today: "The reality is that states have simply been spending far more than they've been taking in." With 49 of America's 51 states running a deficit she feels that they have run out of "wriggle room".

"Ultimately, a legislator is going to have to decide between the bondholder and their constituents, ie, paying the police force or paying the bondholder". Most municipalities will decide their "ultimate constituent" is the taxpayer and public servant not the bondholder.

Yet it's not all doom and gloom for America. "The US is a composite of many different economies." Within that there are several "emerging markets". Namely the food-producing states such as Kansas and Iowa, or Texas which is "a massive beneficiary of the price of oil".

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.