Eurozone Meltdown Would Hit NY, California, Texas Among the Hardest, Report Warns

Thursday, 22 Dec 2011 02:32 PM

 

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Should the eurozone debt crisis drag the continent into a recession, states and regions in the United States would not be immune to the fallout across the Atlantic, a report said.

Europe is a significant trading partner with the United States, particularly states such as New York, California and Texas, the three most populous — and among the largest issuers of municipal debt — in the country.

According to a white paper from eBooleant Consulting, those states contributed a large percentage of the $1.3 trillion in exports to Europe in 2010.

"What's going on in Europe is not going to stay in Europe — it looks progressively worse," said Philip Fischer, managing principal at eBooleant Consulting, an economics consultancy in New York.
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Although the largest percentage of the New York metropolitan area's exports is to Asia rather than the European Union, slowed growth in the EU would have an impact on both the city and New York State, Fischer said. The effect would be "material but manageable."

The biggest state exporter to Europe is California, and the largest cities that export to Europe are New York, Houston and Los Angeles. Fischer, formerly the head of Municipal Bond Research, said some credit spread widening in municipal names could be seen as a result.

"The weaker credits in muni markets in those zones are going to see some effect," he said.

The eurozone's economy has struggled as several nations, including Italy and Greece, deal with rising borrowing costs and as the region attempts to confront heavy debt loads through severe austerity packages. Italy, the third-largest eurozone economy, shrank in the third quarter, setting it on course for what is expected to be a prolonged recession.

MORE ISSUANCE EXPECTED IN 2011

Long-term U.S. taxable and tax-exempt municipal bond issuance is forecast to total $347.0 billion in 2012, up from an estimated $288.0 billion this year, according to a survey released on Wednesday.

Total muni issuance, which also includes short-term debt, is predicted to hit $402 billion next year from an expected $342.0 billion in 2011, the survey by the Securities Industry and Financial Markets Association (SIFMA) showed.

"Despite fiscal difficulties at the state and local levels, the strong issuance forecast underscores the market's appetite for municipal bonds," Leslie Norwood, SIFMA managing director, said in a statement.

SIFMA's "2012 Municipal Bond Issuance Survey" also found that respondents projected long-term tax-exempt municipal issuance would hit $303.0 billion in 2012, a 20.2 percent increase from the $252.0 billion estimated for 2011.

Survey participants also forecast that long-term taxable municipal issuance would total $35.0 billion in 2012, a 25.0 percent increase from the $28.0 billion estimate in 2011.

Survey respondents said they expect the two-year U.S. Treasury note to yield 0.5 percent in December 2012, up from 0.25 percent in December 2011; the 10-year Treasury note is forecast to rise to 2.5 percent in December of next year from 2.0 percent this month, SIFMA said.

In secondary trading on Wednesday, municipal bond prices were down slightly, according to a final market read by MMD, a unit of Thomson Reuters.

Yields on top-rated 10-year muni bonds rose 1 basis point to 1.93 percent, just off the record low level hit on Monday on MMD's benchmark triple-A scale. Since December 1, yields on 10-year munis are down by 29 basis points.

Yields on triple-A rated 30-year munis rose 2 basis points to 3.64 percent, according to MMD.

The record low yield for the 30-year maturity is 3.44 percent, hit on September 22.

© 2014 Thomson/Reuters. All rights reserved.

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