Thu, October 09, 2008
Massachusetts Asks Treasury For Short-Term Credit
Saturday’s Boston Globe reported that MA Treasurer Tim Cahill has approached the Treasury about extending credit to the state on terms similar to those that have been offered to Wall Street, and the LA Times says that the “Governator†of California has also written Treasury Secretary Paulson to ask for a short-term loan of $7 Billion.
States and municipalities, like businesses, often manage their cash-flow needs with short-term debt placements, but the problems in the credit markets have been making it hard for states to borrow money. The interest rates demanded by purchasers of short-term paper are so high that states are having trouble borrowing money as money-market funds and other traditional buyers back away from their debt.
Apparently, some investors have figured out a way to profit from this situation: there’s evidence that traders have been using derivatives to bet against the state of New Jersey as its financial picture weakens, according to the NY Times. Other fiscally-weak states are likely targets for this strategy.
Like most states, Massachusetts has experienced a drop-off in its tax revenues as the economy softens. Happily, the Bay State doesn’t seem to be in quite the shape that California, Michigan, or New Jersey are in. Boston’s financial industry, the second largest in the nation, will certainly feel a chill along with Wall Street, but the state’s economy is fairly diverse. The large number of universities, hospitals, and life sciences businesses in the state have helped stimulate the commercial construction industry here. As I noted in May, the state’s housing market might be ahead of others in turning the corner, but it’s not likely to take off quickly. I’ll be happy to see unequivocal evidence that the state’s housing market has bottomed.
Although the public’s attention is largely focused on the depressing state of the stock markets, the inability of corporations and municipalities to borrow in the credit markets is probably the bigger problem. Right now banks, mutual funds, and other large financial-sector players are sitting on their cash, partly out of fear that a loan made might not be repaid. This seems especially irrational in the context of municipal debt, though. Since municipalities have the power to levy taxes, their default rates are much lower than those of corporations.
Hopefully, the efforts of the central banks to calm world financial markets will start to gain some traction in the credit markets in the next few weeks.
