California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.
Once these conditions become fully discounted by the bond markets, municipal issuers will face the same exorbitant costs that Greece now faces:
Greece continued to pay a stiff premium Monday to raise €5 billion ($6.71 billion) in its third syndicated bond offering of the year, a demonstration that the announcement last week of a possible European Union rescue package has done little to lower the troubled country's high cost of borrowing.
How did America get to become so much like Europe? We don't have to look to conspiracy theories. The inertia of material prosperity taught us for decades that we could live off the wealth accumulated by the hard work of our ancestors. Now we realize too late that we learned a false lesson. The only relevant question now is whether we can survive years of austerity without completely losing the American national character.
Muni bond buyers, beware. I own no California municipal bonds at this time.