If history is a guide, it probably will remain so. Jefferson County, Alabama, which defaulted on almost $4 billion in sewer debt several years ago, is an outlier. When they do, they usually cure them in pretty short order, in months if not weeks.

Actual municipalities, that is, cities and counties, rarely default on their obligations.

The same long wait is true for bonds used to build speculative projects like toll roads, or de-inking mills, or aquariums, or any of the other various quixotic stuff that has been financed in the municipal market. Dirt bonds are the overwhelming majority of those that have defaulted over the past few years. In the case of so-called dirt-bonds, used to finance infrastructure improvements to real estate developments, for example, bondholders have to wait until the real estate is foreclosed upon and sold before they see any end to their money woes. That’s because it takes years to cure some of these things. And by doing it that way, by counting bonds that are already in default, you can come up with many more billions of dollars in defaulted municipals every year. Some analysts, scanning the daily material event notices at the Municipal Securities Rulemaking Board’s EMMA web site, count all notices of default that are posted by issuers. How are you counting? The people at Distressed Debt Securities, who have been doing it for decades now and who are the only ones with a historical database over that time, and who use a consistent methodology in their approach, count new defaults only in their calculations, which I think is the correct way to do it. The $100 billion over the next five years isn’t outside the realm of possibility. In 2010, 82 deals failed to pay on $2.7 billion in bonds. In 2009, more municipal bonds defaulted, 207, on a lower dollar amount, $7.3 billion. The record year for municipal bond defaults was 2008, when 167 issues totaling $8.5 billion went bust, according to the Distressed Debt Securities Newsletter. What’s more, it may not be so outrageous, depending upon how you count defaults. That $100 billion estimate from the Roubini firm isn’t in the same league as the Whitney call. “ And so noted doomsayer Nouriel Roubini joins the numerous commentators who have opined about the municipal bond market, the most famous, of course, being Meredith Whitney, who in December on the CBS show ‘60 Minutes’’ blurted out the prediction that there would be ‘hundreds of billions’’ of municipal bond defaults in 2011. Nouriel reminds us that “governments cannot be liquidated” like corporations.īloomberg’s Joe Mysak observed the following about Roubini: His base-case estimate of defaults over five years for the investment-grade sector was under $30 billion, with “ultimate recovery” of nearly all the losses. He noted that most of the bonds he expected to default were in the high-yield or junk-bond category. Nouriel Roubini suggested that there may be “close to $100 billion of defaults over five years, but typical 80% recoveries are far higher than on corporate bonds.” Nouriel outlined his view of trouble in the Muni world and attempted to measure the exposure in a very thoughtful way.

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Muni defaults