From: Truth Out
by Ellen Brown
In an inscrutable move that has alarmed state treasurers, the Federal
Reserve, along with the Federal Deposit Insurance Corporation and the
Office of the Comptroller of the Currency, just changed the liquidity
requirements for the nation’s largest banks. Municipal bonds, long
considered safe liquid investments, have been eliminated from the list
of high-quality liquid collateral. assets (HQLA). That means banks that
are the largest holders of munis are liable to start dumping them in
favor of the Treasuries and corporate bonds that do satisfy the
requirement.
Muni bonds fund the nation’s critical infrastructure, and they are
subject to the whims of the market: as demand goes down, interest rates
must be raised to attract buyers. State and local governments could find
themselves in the position of cash-strapped Eurozone states, subject to
crippling interest rates. The starkest example is Greece, where rates
went as high as 30% when investors feared the government’s insolvency.
Sky-high interest rates, in turn, are the fast track to insolvency.
Greece wound up stripped of its assets, which were privatized at fire
sale prices in a futile attempt to keep up with the bills.
The first major hit to US municipal bonds occurred with the downgrade
of two major monoline insurers in January 2008. The fault was with the
insurers, but the taxpayers footed the bill. The downgrade signaled a simultaneous downgrade of bonds
from over 100,000 municipalities and institutions, totaling more than
$500 billion. The Fed’s latest rule change could be the final nail in
the municipal bond coffin, another misguided move by regulators that not
only does not hit its mark but results in serious collateral damage to
local governments – maybe serious enough to finally propel them into
bankruptcy.
No comments:
Post a Comment