Who's Afraid of municipal defaults?

For many months, financial pundits have been predicting dire times for U.S. local governments. Lower revenues and rising expenses have put the squeeze on municipalities and talk of local, and even state, government bankruptcy has become a major story line in the financial media. In this study, the authors have set out to test the predictions in the popular press and to examine the possible reasons for and against widespread municipal defaults. The authors have employed both economic and legal analysis in the study. They first examine the financial sources of municipal budgetary stresses and then analyze municipal bond investor activity seeking a correlation between either set of factors and the current predictions of a municipal market meltdown. Finally, the authors examine municipalities' options under Municipal Bankruptcy Law in order to test whether those options are driving current bond issuer behavior or investor sentiment.