Asked B.V. from Port Richey, Fla.:
I’m thinking of buying $50,000 of high-yield Illinois municipals where I can get 8% to 10%. How could Illinois' deficit become so large?... What do you think?
The question was submitted to financial advisor Malcolm Berko at uexpress.com. Berko's answer, "Illinois Municipals Are Loaded With Risk" was informative and insightful. Here's his explanation why Illinois' bonds haven't sunk to junk bond ratings, as they should:
Now, Illinois’ legislators want to raise taxes for the umpteenth time. Moody’s, S&P and Fitch rate Illinois debt a notch above junk, though knowledgeable observers are quick to say “bull.” The rating services colluded with the banks and legislators to eschew a junk rating; banks are not allowed to carry junk-rated munis on their books and could be forced to sell them.
This is frightening. What if the banks were forced to sell those near-worthless bonds? Illinois would be crippled, unable to pay for even the most basic services. That's because a significant portion of Illinois' budget that pays for day-to-day expenses, pensions and debt service is funded by the sale of bonds. Yes, it can get worse in Illinois.
And what caused this mess? Berko had three answers:
Illinois’ problems are three-fold: an infamously crooked legislature, infamously crooked unions and an expansively ignorant electorate.
Want to subscribe to the Barbershop? Type your email address in the box and click the "create subscription" button. My list is completely spam free, and you can opt out at any time.