Jamie Dimon, CEO of JP Morgan Chase, (center) expressed his views about municipal bond on a panel at the World Economic Forum moderated by TIME’s Fareed Zakaria (Vincent Kessler/REUTERS)
There has been a lot of anxiety about Munis recently. Bank analyst Meredith Whitney, who was early in calling problems in the financial markets before the crisis, predicts as many as 100 significant defaults in the municipal bond market, costing investors potentially $100 billion in losses. On Wednesday, at TIME’s Davos kick-off panel NYU economist Nouriel Roubini cited the problem local governments were having paying down debt as one of major potential minefields that could derail the recovery. So is a market that is a key staple of many individuals’ portfolios set to blow up and take the economy with it?
Perhaps not. At least that was the view expressed by Jamie Dimon, CEO of JP Morgan Chase, on a panel at the World Economic Forum called The Next Shocks: Are We Prepared, which was moderated by TIME’s own Fareed Zakaria. Dimon said that while states and munis have a debt problem, it’s not a big enough problem to derail the economy in 2011 or 2012. But while munis may not be a big economic threat, they could cause some investing shocks this year. Here’s why:
First of all, Dimon said the bonds of states and those of counties and cities, all of which are considered muni debt, are in a very different situation. States have much greater taxing power than more local municipalities. So it is much easier for them to correct their problems. Illinios, for instance, recently raised its income tax 60%. Most muni bond investors think that will go a lot way toward solving that states problems. What’s more, States can’t actually go bankrupt.
Municipalities, on the other hand, are in a more difficult situation. Dimon said he did think we would see some defaults among local governments. But that’s not that unusual. There are a handful of defaults a year in the muni market.
Lastly, the US entire US municipal bond market is not that big. Just $200 billion was issued last year, compared to nearly $1.5 billion in US Treasuries. And municipality debt, which is what Dimon says to be worried about, is only a fraction of that smaller market. So Dimon says that this is not a huge problem for the economy or for banks.
That’s not so say there won’t be ups and downs for investors. The real problem when it comes to munis is that it is primarily a market for individual investors and pension funds. Both of those investors don’t like to lose money. That’s why they’re invested in the highly-rated municipal bond market. That means we don’t even need to have the 100 defaults that Whitney is talking about to have a flood of investors leave the muni market. And unlike CDOs, the market for munis is pretty liquid so prices can fall fast, at least in bond terms. Perhaps, even a dozen defaults could be enough to scare away investors who have always believed that munis were rock solid. That may not be an economic minefield, or a banking minefield, but it could be an investing one.