Even as the world recovers from the woes sparked by the US housing market, analysts are predicting another crash—of the municipal bond market, which may leave dozens of American towns and cities bankrupt over the next year. State and local government debt has climbed to 22% of the US gross domestic product.
In Europe too, cities’ credit ratings are floundering; Venice is selling canal-side palaces to pay its deficit, and Florence and Barcelona have been placed on review for possible downgrades by Moody’s.
Like US consumers, local governments have been living beyond their means for some time now. Federal governments, already weary from injecting funds into banks and corporations, will have to either widen their deficit with further bailouts or stay firm and watch cities file for bankruptcy. Neither bodes well for the international economy.