Europe's PIIGs are in a poke, but U.S. states and municipalities risk their own sovereign debt crisis, with a huge liquidity risk from short-term debt. According to the Federal Reserve, at the end of the first quarter of 2010, state and local governments had $2.8 trillion in outstanding debt. This massive figure doesn't count unfunded pension liabilities (which, except for a few governments in immediate distress, face a longer-term solvency crisis), but does include $465 billion of debt issued on behalf of nonprofits and private industrial revenue bond borrowers, many of whom are politically connected. Of the $2.8 trillion, perhaps 25 percent effectively consists of short-term obligations, much of which was purchased based on questionable ratings resting on doubtful guarantees. Even if only a few financially stressed municipal debt issuers default, anxious short-term debt holders could suddenly demand cash and trigger a liquidity crunch.
For more, see The Next Sovereign Debt Crisis by Jay Weiser, August 3, 2010, at The American Enterprise Institute.
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