Legislation to be Introduced to Allow States to Declare Bankruptcy, says Newt Gingrich

by Mark on January 23, 2011

I’ve been posting recently on the possibility that in the near future states could be able declare bankruptcy and renegotiate contracts (think unions) and reorganize debt (think bonds), just as cities do.

It turns out that Newt Gingrich, who has been championing this idea for months now, is becoming more specific on the subject. Reuters has the story:

Legislation that would allow U.S. states to file for bankruptcy will likely be introduced in Congress within the next month, Newt Gingrich, the former speaker of the House of Representatives and a powerful Republican party figure, told Reuters on Friday.

“We’re faced with the danger that the states are going to try to show up and say to Washington: You have to give us money,” Gingrich said. “And I think we have to have an alternative that allows us to say no.”

While he declined to comment on who might introduce legislation, Gingrich said there was support in both the House and the Senate. He said lawmakers have been looking into the idea for three or four months.

Some states are saying they aren’t interested in such an option:

And California — a state which Gingrich said would likely turn to Congress for financial help along with New York and Illinois — said on Friday it has no interest in using bankruptcy to solve its fiscal problems.

California, the eighth largest economy in the world, would not benefit from the legislation, Treasurer Bill Lockyer said.

“States didn’t ask for it. We don’t want it. We don’t need it,” Lockyer said. “Bankruptcy would devastate states’ ability to recover from the recession and make the infrastructure investments that create good jobs.”

I don’t believe them. The thing is, their obvious first choice would be for them to get a bailout (or a round of stimulus) from the Washington. They can’t show their hand that bankruptcy could work for them, or they’d lose their bargaining leverage. That’s not how you play poker. But the more immediate issue is the just talk of the state bankruptcy of state bankruptcy would send bondholders into a panic, and dry up new bond sales. New York State Comptroller Thomas P. DiNapoli explains:

“Just the availability of a bankruptcy option and the potential bond default could severely damage state credit ratings and destroy the trust of bondholders.”

Bingo.

My great friend and broker tells me that right now is a great time to buy bonds, as the “headline fear” of defaults is so high, and as a result the rates I can get are high. But, I tell him that we haven’t seen anything yet, and I’m going to wait until the shit hits the fan. I don’t yet see the blood in the streets.

What do you think will happen?

http://www.economiccollapse.net/legislation-to-be-introduced-to-allow-states-to-declare-bankruptcy-says-newt-gingrich