“Dr. Doom's” Firm, in Counterintuitive Claim, Says US Better Off Than Europe

David Nowakowski, director of credit strategy at Roubini Global Economics (RGE), argues that the US is much better off than other developed economies.

(April 20, 2011) – The firm run by “Dr. Gloom” himself is making a counterintuitive claim: the United States, thought by many to be on the verge of bankruptcy, is in fact better off than Europe.

With the United States receiving a “negative outlook” from Standard & Poor’s and the Eurozone crisis continuing to escalate, it is apparent that the world’s advanced economies are battling an increasingly worrisome fiscal situation. Yet, David Nowakowski, director of credit strategy at Roubini Global Economics (RGE), is asserting that the problems in Europe are much more severe – and harder to work out from an investor perspective – compared to the debt issues facing the US. “We’re much better off than many Eurozone countries like Portugal and Ireland,” he tells aiCIO, adding that he believes widespread assertions that municipalities are on the brink of disaster and heading for bankruptcy are blown out of proportion.

According to Nowakowski, the main problem regarding the US’s debt problems is an exit strategy to the fiscal and monetary stimulus that has kept the economy on course. “Without a more robust recovery and additional action, municipalities’ revenues will never recover to its pre-crisis levels. We need to have political agreement for a longer-term deficit reduction,” he says, indicating that the problems in the US – similar to other advanced economies – will only be aggravated by demographic change and an aging population. However, a political solution is in the cards, he believes.

The S&P debt warning highlights the comparison between the US and Japan, Nowakowski says. Japan lost its AAA status in 2001, but the resulting reform and the reduction in deficits from 2006 to 2008 allowed it to win back its AAA status from Moody’s. However, Nowakowski warns about drawing too strong a parallel between this example and that of America and Europe in 2011. “The US has much better demographics and growth outlook than Europe and Japan,” he says.

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Buttressing Nowakowski’s claims, RGE issued a report yesterday in response to the S&P’s rating action, asserting that while the US is on an unsustainable fiscal path from which it cannot exit without political consensus, it will “do the right thing.”

“The United States has the most manageable fiscal issues of any major advanced economy because federal, state and local revenues as a share of GDP are very low, for cyclical and other reasons,” the report claimed. “Therefore, fiscal balance can be restored by fiscal adjustment without major economic difficulty in the near term.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Despite turbulent economic times and bigger anticipated payments to underfunded public pensions, a new study has indicated that few municipalities will default on debt.

(April 19, 2011) — A Federal Reserve economist is challenging the widespread assertions that municipalities are on the brink of disaster and heading for bankruptcy, claiming that the argument is overblown and lacks perspective of past recessions.

In the midst of a challenging fiscal environment, with underfunded public pensions demanding larger annual contributions to return to stability, a new study released by the Federal Reserve Banks of Chicago — titled “Local Governments on the Brink” by economist Richard H. Mattoon — asserts that few municipalities will default on their debt. While there is little disagreement that 2011 will be a tough year in terms of local government finance, the study claims that given the mounting challenges of the current environment and the perceived threat of a wave of local government bankruptcies and credit defaults, the concerns about bankruptcy and default may be overblown.

The reasoning: “For one, the fiscal resources of local governments are deeper than commonly believed. Also, local governments often can take intermediate corrective budgetary action (usually at the insistence of the state) to avoid bankruptcy. Finally, in most cases this corrective action is preferable to the stigma that bankruptcy creates, particularly with regard to the issuance and performance of municipal bonds,” the report asserts, noting that municipalities appear to have reserves that can be tapped in the short-run. The report argues that a potential default would severely limit a local government’s access to credit.

“There is clear statistical evidence that since 1999, local governments, in aggregate, have been increasing their debt. However, it is hard to make the case that this debt is reaching an unmanageable level,” the report says, noting that municipalities have been aided by infrastructure. “…Municipalities tend to issue debt for infrastructure projects, and evidence suggests that they tend to match the term of the debt to the life of the project.”

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The report echos findings of a previous paper released in March titled “Municipal Bond Woes,” authored by Atlanta Fed economist Gerald Dwyer, which stated that data on state and local governments “do not support a forecast of widespread defaults and losses on municipal bonds.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742