States: The New Strategic Defaulters
Arvamus 07 Jul 2010  EWR
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Josh Barro, Real Clear Markets
When we talk about a Greek default, the concern is that Greece is literally unable to pay its bills: more bonds come due than can be repaid in the current year, and nobody is willing to issue Greece new debt at an affordable interest rate. For this reason, any strategy to prevent default involves both austerity measures in Greece, to eliminate budget deficits; and loan guarantees from outside entities, which make it possible to roll over Greek debt.

Essentially, Greece faces simultaneous problems of solvency and liquidity. Greece can fix the solvency problem on its own, though not without considerable pain, by cutting spending and raising taxes. But those solvency measures will take some time to be effective, during which time outside help is needed to fix the liquidity issue.

As the bond yields of certain US states rise, especially Illinois and California, the comparisons to Greece have been obvious. But there is a key difference: state debt crises are almost entirely a matter of solvency. Because of the long-term nature of most state debts, states face little rollover risk and could even weather a complete loss of access to debt markets -- so long as they act to get their books into balance going forward.

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