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Harrisburg, Pa Files for Bankruptcy: Is Meredith Whitney Right?

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Harrisburg, Pennsylvania now has the distinction of becoming the second U.S. city to file for bankruptcy protection this year. Pennsylvania's capital and the city of 49,000 has been struggling under a massive debt burden for years after an incinerator project ballooned to $300 million - 5 times the city's budget. It's the largest municipal default since Vallejo, California went under in 2008.

"We clearly will have more and more stress coming," says David Levy, chairman of the Jerome Levy Forecasting Center. He is not, however, as confident as financial analyst Meredith Whitney about an impending municipal market meltdown. Whitney made headlines this year and last when she released a report predicting hundreds of billions in municipal market defaults. (See: Muni Bonds: The Next Crisis?)

Even as Harrisburg brings the issue to the fore, the U.S. has yet to see the kind of market deterioration Whitney expects. Earlier this year, the small town of Central Falls, Rhode Island went bankrupt, and recently Alabama's Jefferson County narrowly avoided its own filing.

Levy does warn that if counties and cities continue to run into troubles, there will be less hope of greater government assistance. "States under their own distress are going to become less and less generous," he says. That means we can't count on bailouts. Unless of course, the defaults move up the ranks and start directly hitting financially fragile states like California, New York, Illinois, etc. In that case we may see a federal bailout. "They (Washington) may have to at least help them work it out some point," he says. "A state like California is too big to fail."

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