WSJ: Muni Default Estimate: $100 Billion

A consulting firm founded by economist Nouriel Roubini said there could be close to $100 billion of municipal-bond defaults over the next five years as state and local government-debt problems damp the U.S. economic recovery.

That figure would by most estimates represent a significant increase over defaults in recent history, but it doesn't appear to be as dire as a prediction last year by analyst Meredith Whitney.

Mr. Roubini is known for his prescient warnings about the 2008 financial crisis. In weighing in on the muni-bond market, his firm joins a chorus of high-profile commentators who have offered their take on the fate of the once-staid market. It took a dive late last year and in recent weeks has made up some losses.

The report, by David Nowakowski and Prajakta Bhide at Roubini Global Economics and released to clients Monday, says state and local debt problems aren't "systemic" in nature, nor will they "infect the financial system." The authors of the report declined to comment.

Most of the defaults will occur among special government projects and revenue-generating entities that aren't considered viable, it says. "Defaults will continue to be isolated events.''

Tracking the total number of defaults can be difficult because they are concentrated among small bonds that aren't rated by national rating firms. Those firms typically track the bonds they rate.

S&P/Investortools Municipal Bond Index, which includes $1.27 trillion of municipal debt outstanding, reported $2.65 billion in defaults last year down from $2.9 billion of new defaults in 2009.

Combined defaults of rated and unrated bonds were as high as $8.5 billion in 2008, according to some estimates.

The Roubini report says that relying on the history of low default rates in the municipal debt market is "Pollyannaish."

"Avoiding a crisis will involve real austerity that has only partially been implemented thus far," the report states.

Still, the report points out that recovery rates for investors on defaulted muni bonds are typically about 80%, "far higher" than for corporate bonds. It also said an analysis of the Chapter 9 bankruptcy provision for municipalities shows bondholders retain strong protections.

Ms. Whitney, an independent analyst who correctly predicted future bank troubles in 2007, last year made a controversial prediction of 50 to 100 sizable muni-bond defaults, totaling "hundreds of billions of dollars."