With the SEC's recent investigation into California, for misstating the financial health of CALPERS, it may come as good news to bond investors that Moody's recently decided to start incorporating pension fund liabilities into its rating of state debt securities.
And certainly it's not a surprise, as bankers at Davos warned of financial Armageddon, should Basel III force investors into the "risky" sovereign debt market.
But I can't help but think that the move is meant not to help markets, but to force States into a quick solution before we can have a serious national conversation about dealing with state budget woes.
It works like this. The banks (so they say) want safe investments. Now. And what's safer than a government bond? Indeed, they will be forced to buy these bonds, if and when Basel III gets implemented. And states rely upon governmental bond markets to operate. Moreover, everyone's scared of a new toxic-asset crisis. So what happens next is a bit like blackmail:
Mr. Kurtter [from Moody's] said Moody’s had decided it was important to consider total unfunded pension obligations because they could contribute to current budget woes.
“These are really reflections of the budget stress that states and local governments are now feeling,” he said. A company with too much debt could close its doors, he said, but governments do not have that option.
“They have a tax base. They have contractually obligated themselves to make these payments. These are part of the ongoing budget stress,” he said. “It ultimately all comes back to being an operating cost. Addressing those problems is really what’s happening today.”
In other words, to get back their high-grade rating, and ensure access to credit, States have three options:
(1) raise taxes
(2) slash spending
(3) spin off pension funds through bankruptcy
Which one do you like??? I'm betting the pols and banks will bear down on #3.
Thanks Moody's.
