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Whitney: High Interest Rates Will “Trigger a Real Downsizing” for Cities

Daily Ticker

Meredith Whitney famously predicted in December 2010 that “hundreds of billions of dollars” of municipal defaults would happen over the next 12 months. Whitney's call never materialized and the former banking analyst was widely criticized. She just published a new book, Fate of the States, in which she discusses the cause of the 2008 housing crash and forecasts boom times for the states that escaped the residential crash and burn. But investors and analysts are eager to get Whitney's take on Detroit's filing for bankruptcy protection -- the largest in U.S. history -- and revisit her notorious prognostication again. She called the filing "a game-changing event."

When asked how Detroit’s situation will impact the muni bond market more broadly, Whitney demurred.

“Well let me turn that question back to you because you have more experience in the muni bond market than I do,” she says to The Daily Ticker’s Aaron Task in the attached video. “What do you think?”

Related: Bernanke Costs Illinois $130M: ‘Blue States’ in Peril, Meredith Whitney Says

When pressed, Whitney agrees with Task that cash-strapped cities and municipalities will likely pay high interest rates on their bonds from creditors, a situation that would dig local governments deeper into debt. She explains:

“In state constitutions there are caps on the debt service payments but not caps on the total debt outstanding that a state is allowed to carry. So when you have very low interest rates, and very cheap costs to borrow, you can borrow a lot. Now all of a sudden if your cost of borrowing has gone up by a factor of 2x, you’re hitting limits that are actually going to trigger a real downsizing for a lot of the municipalities that have been really going for broke over the last couple of years.”

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