"Why Isn’t Illinois A Bigger Story Than Greece?"

Good question. One answer:

Why then would anyone buy an Illinois municipal bond, or accept a state contract that requires future payments, or move a business to the state, or keep a business in the state, or do anything else that required faith in the willingness or ability of the state to pay its bills? The only possible answer is that Illinois isn’t Greece; it’s Spain or Italy, an entity so big and important that its failure is inconceivable. When it hits the wall, Washington will have no choice but to step in and cover its unfunded pensions and teacher salaries and muni bond interest. In the same way that a Spanish bond is really a German bond because Germany has no choice but to make good on it, the big insolvent US states are wards of the central government.

Comments

[International Finance Lawyer]

Illinois state debt does not present the same systemic risk as Greek sovereign debt.

Greek debt is held by banks.

Illinois debt is held by individuals.

Banking regulations favor sovereign debt of EU members as a bank asset class. The risk weighting is much lower than the actual risk, so banks get a risk premium they would not be permitted in other asset classes. Banks are disproportionately invested in EU sovereigns. This is particularly true of EU banks, which are also subject to the moral suasion from the ECB and regulators.

On the other hand, US tax law favors municipal debt as an asset class for high-net-worth individuals. The overwhelming majority of Illinois state debt is held by rich individuals.

Consequently, Greek sovereign debt has a systemic risk that Illinois sovereign debt does not. Moreover, bailing out Illinois is bailing out the famous 1%.

One other difference: The ECB, the EU and EU member governments are controlled by elites that are much better insulated from popular fury than the US government.

Bailing out GM is one thing; any senator or congressman from Iowa (or even New York) who voted to bail out the public employees and rich bondholders of Illinois or California (and a President who approved and administered it) would be looking for a job after the next election. The Democratic Party might be the political wing of the public employee unions, but even it has sufficient sense of self-preservation not to grab a 765 kV line.

[JorgXMcKie]

"even it has sufficient sense of self-preservation not to grab a 765 kV line."

Please show your evidence.