With more than $200 billion in federal stimulus money going directly to states, one might think that the feds were done bailing out the not-so-thrifty of the fifty (plus Puerto Rico). Municipal Market Advisors, which studies the state and local government bond markets, doesn’t think so.

Speaking of California’s ongoing meltdown, MMA says that “we are increasingly convinced that an ever-more-interventionist Federal government will ultimately provide emergency cash to the states if needed. [Puerto Rico] may also need to test that idea should its own deficit plans falter.”

Despite the stimulus money, California likely will “rely on massive year-end borrowing” to close its deficit. “Regarding CA, [general-obligation] bondholders are still in very limited jeopardy of temporarily missing a payment.”

But, unlike seven years ago, during the last, and less severe, fiscal crunch for states, the markets aren’t particularly primed to receive such massive borrowing. Back then, heavily leveraged institutional buyers like hedge funds were buying, not selling.

MMA’s analysts also worry that states and cities that aren’t in such dire straits could face higher financing costs for future capital projects if “rapidly escalating estimates of the various bailout/stimulus programs’ costs … overwhelm Treasury buyers with supply.”

That is, the federal government will have to pay more in interest to attract Treasury bond buyers, and states and cities will have to do the same to compete. I mentioned this risk in last Friday’s Post piece on how New York had better spend this stimulus money wisely.

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