Feb 20, 2011 4:14 PM GMT
It will be useful to watch the coming spreads. I suspect that the Governor will prevail. If he doesn't, what happens to the premium paid on muni's will show whether or not there is reason for concern (higher interest rates mean higher costs for already highly indebted municipalities and states) and increasing the probability of default.
The newly-elected GOP governor of Wisconsin is eager to push through a bill that would kill collective bargaining for state workers. It would pass, except for one problem, which is that Democrats have fled the state to Illinois to prevent a vote.
First of all, we think this will end in tears for the Democrats. They look like wusses fleeing the state, and it could even hurt Obama, if he's forced to come in on the side of state unions.
For muni investors, there are two reasons to worry.
The first is that nobody had Wisconsin on its list of big states to worry about going into the new year. That's not to say Wisconsin is going to blow up, but it does suggest that things can and do come out of nowhere all the time. You know, black swans and stuff.
The other reason it's worrisome is that it shows just how far the Democratic party will go to the mat for public employee unions, and how hard it might be to cut costs. A bull case for munis has centered on the idea that there's plenty of room to cut expenses, before having to default on debt. But if this debate is ripping apart a state like Wisconsin, then it should make you question that assumption.