Cutting the hours a public library is open isn’t a municipal-bond default.
Disbanding a city’s symphony orchestra isn’t a municipal-bond default.
Asking retirees to pay more for health-care coverage isn’t a municipal-bond default.
The picture of state and local finances is murky enough without analysts and observers muddying it by expanding the definition of municipal-bond default to include -- well, just about anything and everything, as some people have suggested.
Let’s be clear. A municipal-bond default occurs when a borrower fails to repay debt on schedule. Sometimes a borrower is considered technically in default if it violates terms of its covenant with bondholders. If the borrower promises not to invade reserve funds, for example, and then does so in order to repay debt, that’s a default, even though the bondholders may be paid in full.
Terms of Debate
This all goes back to Meredith Whitney’s appearance on “60 Minutes” last December. That was when the terms of the default debate began shifting.
If you go back and view the segment that was watched by millions of Americans, you’ll see that correspondent Steve Kroft asks about municipal bonds, and analyst Whitney predicts there will be a “spate” of defaults, 50 to 100, and these will amount to “hundreds of billions of dollars.” This will all come to pass in the next 12 months, she said.
That’s what millions of Americans heard. Whitney wasn’t talking airily about defaults on the social contract or on promises made to retirees. No. This call and the subsequent controversy surrounding it were specifically about the debt securities sold by states and localities to borrow money.
It would be nice if we could somehow proscribe the use of the word “default,” and limit it to the promises attached to municipal bonds. We can’t. Webster’s New World College Dictionary defines default as: “failure to do something or be somewhere when required or expected.”
But we can, and must, limit the word’s use when it comes to Whitney’s prediction about the municipal-bond market. The analyst was referring to something very particular when she appeared on television.
Out of Time
Bloomberg News carried a story this month about how time is running out on Whitney’s prediction. After all, in the first half of 2011, municipal-bond defaults were way down.
So far this year, $746 million in munis have defaulted, according to the Distressed Debt Securities newsletter. In the first half of 2010, the figure was $2.3 billion, and in 2009 it was $4.89 billion.
A lot of people think Whitney should be held to account for this prediction, and look forward to her saying, on New Year’s Eve, or perhaps even on “60 Minutes,” I was wrong, and here’s why, or maybe saying, I didn’t know what I was talking about. Punditry being what it is, that’s unlikely. Pundits crow, but rarely eat crow.
Unfortunately, there are those who, for reasons of their own, now seek to expand the definition of default after the fact and so extricate the analyst from a predicament of her own making.
And you know what? If default is redefined to include everything under the sun, then Meredith Whitney wins.
(Joe Mysak is editor of Bloomberg Brief’s daily Municipal Market. The opinions expressed are his own.)
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