Illinois as Italy

Over at John Rubino asks, “Why Isn’t Illinois a Bigger Story than Greece?” Describing the Land of Lincoln as a “failed state” with $8.5 billion in unpaid bills, $27 billion in outstanding bonds and $80 billion in unpaid pension liabilities, he writes:

For investors it’s a clear sign that some sort of default is coming.

Why then would anyone buy an Illinois municipal bond, or accept a state contract that requires future payments, or move a business to the state, or keep a business in the state, or do anything else that required faith in the willingness or ability of the state to pay its bills? The only possible answer is that Illinois isn’t Greece; it’s Spain or Italy, an entity so big and important that its failure is inconceivable. When it hits the wall, Washington will have no choice but to step in and cover its unfunded pensions and teacher salaries and muni bond interest. In the same way that a Spanish bond is really a German bond because Germany has no choice but to make good on it, the big insolvent US states are wards of the central government.

If and when the federal government starts covering the liabilities of broken states, there will be no limit to the drain on federal resources and the transfer of wealth from other states. Virginia needs to elect hard-core fiscal conservatives to Congress who will fight such an eventuality tooth and nail.

At the state level, it is all the more imperative to build rock-solid finances that can withstand the contagion of fear that will emanate from Illinois, California or any other state that might default.


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5 responses to “Illinois as Italy”

  1. “default” is an interesting concept for governments. With corporations.. it has serious meaning because creditors can and will force a company into bankruptcy and end it’s existence.

    with govts, not so. In fact.. govt… like Illinois will continue to receive tax revenues every day, every year with which to pay bills.

    “Ah yes” you say “but not all of their bills”…

    very true but what are the options of the creditors?

    not default and a forced sale of assets… right?

    I think Brazil and Chile defaulted… what was the consequence?

    neither of them got repossessed, right?

    what really bad stuff happened to them beyond losing their ability to borrow more money?

    they still collect taxes and run their govts, right?

    What’s the worse thing that will happen to Illinois?

    I think the word “default” does not mean the same thing with respect to corporations and governments.

    and just like the ignorance associated with the phrase “trust fund” – not truly understanding the difference leaves people with a inaccurate idea of the consequences.

    I’m not saying the consequences are good just that most states know that there is no such thing as “going broke” in the sense that a company does.

  2. I don’t suppose there is a likelihood of a takeover of Illinois by either Indiana or Missouri. I’m not sure anyone has an idea of what default by a sovereign state means. Did any state go bust during the Depression? What about the Southern States during reconstruction? I know that Virginia’s politics were dominated with debate over whether the state needed to pay war debts or whether they should be “readjusted.” Former Confederate General Billy Mahone was a Readjuster.

  3. I think since Bacon is writing all this Boomergeddon stuff..he should regale us with what happens….

    We just got good news and … bad news. We’re told that property values are DOWN…. but the BOS will have to RAISE TAXES to EQUALIZE.

    Tell me who else gets to do that?

    so my guess is ..if Illinois gets in trouble that it means higher taxes….but not overt.. sneaky… “fees” , etc… less services… crumbling infrastructure, etc.

  4. Illinois already raised its income tax by 66%.

  5. yup… and they’ll raise it even more until and unless voters put a stop to it but I don’t see Illinois being repossessed and it’s assets sold at auction ….

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