Fears grow of euro-style debt cri­sis in United States

The Pak Banker - - International -

WASHINGTON: No sooner has the last cri­sis ended, than warn­ings about the next one be­gin. In the dy­ing days of the year, with the sub-prime mort­gage de­ba­cle en­ter­ing the rear-view mir­ror, econ­o­my­watch­ers are warn­ing 2011 could see US states and mu­nic­i­pal­i­ties plunge into a debt cri­sis of that type that has wrought chaos in Europe.

Al­though the US econ­omy is slowly get­ting to its feet af­ter a bru­tal re­ces­sion, state and lo­cal bud­gets are still pros­trate.

To the west, Cal­i­for­nia faces a bud­get short­fall of over 25 bil­lion dol­lars. To the east, New York faces a nine-bil­lion­dol­lar deficit. The north, south and cen­ter of the coun­try are not far­ing much bet­ter.

Only four of the fifty US states are cur­rently keep­ing their heads above wa­ter; Arkansas, Mon­tana, North Dakota and-thanks to oil rev­enues-Alaska, ac­cord­ing to the Cen­ter on Bud­get and Pol­icy Pri­or­i­ties (CBPP). Across the coun­try the short­fall is ex­pected to be at least 130 bil­lion this fis­cal year.

The cri­sis has its roots in the re­ces­sion, when all im­por­tant tax rev­enues fell off a cliff as busi­nesses went to the wall, one in ten Amer­i­can work­ers needed a job and high spend­ing con­tin­ued apace.

Now, with the re­cov­ery grind­ing on­ward and some­what up­ward, tax rev­enues are again ris­ing, but not fast enough to put the books back in or­der.

Rev­enues are still 12 per­cent be­low pre-re­ces­sion lev­els ac­cord­ing to the CBPP.

An­a­lysts at the Rock­e­feller In­sti­tute, a think tank, warn "states will face con­tin­ued, sig­nif­i­cant bud­get chal­lenges in fis­cal 2011 and be­yond."

"The im­me­di­ate out­look is for rev­enue col­lec­tions sig­nif­i­cantly be­low pre-re­ces­sion lev- els, and grow­ing spend­ing pres­sures." Fi­nan­cial sooth­sayer Mered­ith Whit­ney thinks the day of reck­on­ing is at hand, pre­dict­ing as many as 100 cities could go bust in 2011.

That is, in part, be­cause one im­por­tant crutch that has pre­vented fi­nan­cial col­lapse will be kicked away later this year.

Washington's mas­sive 787 bil­lion dol­lar stim­u­lus pack­age, which helped states greatly, will con­tinue to fade out in fis­cal 2011 and 2012.

The prospects for a fur­ther bailout are slim, as lead­ers in Congress and the White House seek to firm up their deficit cut- ting creds. That spells govern­ment job cuts, pro­gram freezes or in­creased taxes.

While only the brave or fool­ish would pre­dict any­thing but con­sid­er­able pain ahead, some key play­ers be­lieve a fully-blown debt cri­sis can be avoided. The most likely trig­ger for a cri­sis would be a ma­jor credit rat­ing down­grade that prompts wor­ried len­ders to charge states and mu­nic­i­pal­i­ties more for loans, putting the au­thor­i­ties fur­ther in debt. One rat­ings agency, Moody's, has al­ready had a neg­a­tive credit watch for US state gov­ern­ments since Fe­bru­ary 2008. -Afp

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