American cities could go bust because of the financial crisis, according to analysts.
The Guardian reports that Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, has warned that more than 100 American cities could go bust in 2011 with the debt crisis sparking a municipal meltdown.
According to the report, American cities and states have debts totaling a whopping $2 trillion. Put simply, they spent money they didn't have on everything. Their credit card is maxed out. Whitney says this, apart from housing, is the biggest threat to the US economy. She warns that we will see a spate of municipal bond defaults.
Now, no state has defaulted on its debts since the Great Depression, when Arkansas took the honors. Even in the midst of the current economic downturn, only three governments – Harrisburg, the state capital of Pennsylvania, a city in California and a transportation project in Las Vegas – have defaulted.
But if it happens, the US government will have to step in. Earlier this year, billionaire Warren Buffett warned that the US government will have to bail out states in the event of a series of municipal bond defaults. And when that happens, you can bet the already monstrous levels of US government debt will get even worse. So much for the recovery in 2011!
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