Bailout Panic Hits America: DC Deadlock Over Illinois Bailout

In what may be the first of state after state seeking a federal bailout Illinois is asking the federal government to guarantee its debt.

For those not well-versed with the Sovereign debt crisis in Europe PIIGS is an acronym standing for Portugal,Ireland, Italy, Spain and Greece which refers to the collective of European  nations that can no longer afford to pay back their debt.

In what is most likely the first sign of a huge problem Illinois has officially announced it will seek a guarantee from the federal government to repay its debt.

A nation or  state doesn’t ask for such a guarantee unless they foresee an actual problem paying back their debt because such an admission tips the Wall Street sharks off that you are wounded and when they smell blood in the water they come attacking.

Once the sharks smell that blood and come attacking the original problem gets worse as Wall Street hedge funds start making open bets that you are going under through using naked shorts and other means.

The initial incident spreads quickly as the sharks attracted to your school of fish start looking for other weak or wounded prey.

The phenomenon  quickly leads to what we are witnessing with Europe’s sovereign debt crisis and is more formally referred to as debt contagion.

It Begins: Illinois Prepares To Request A Bailout From The Federal Government

In this case Illinois clearly sees a problem not being able to repay its pension debt.

Now that problem has been made public the sharks will cut the state’s credit rating and will hike up the price Illinois has to pay to borrow money to pay off its obligations.

Having to pay higher interest on their debt only leads to further credit rating cuts which in turn continues the downward spiral of higher interest rate.

Obviously a big problem lies ahead now that Illinois has lifted the veil of illusion previously made the state to appear creditworthy

The only way to stop this downward spiral and the chain reaction that will follow in other states is for the federal government to step in and guarantee the state’s debt.

The longer the federal government waits the bigger the bailout will be down the road.

If the bailout doesn’t come the state is a dead fish in the water.

The Obvious Simple Solution: Not So Simple With This Congress

But not so fast…  while the solution to the dilemma appears so simple don’t forget one of the few things congress could overwhelmingly agree on was to be able to detain American citizens indefinitely without trial.

Well that and the need to deploy 30,000 NDAA drones over US skies and to continue other constitution trampling practices such as massive warrantless wiretapping which all fall under the “Everyone is a potential terrorist” category.

Troops Already Being Rallied To Fight The bailout

Indeed partisan politics will come into play here as The Illinois Policy Institute is already rallying the troops to rail against a federal bailout of state pensions warning it will lead to more bailouts in other states.

Just say no to a bailout of state pensions

All across the country, states are grappling with pension funds that are massively underfunded. Under new accounting rules, Illinois’ unfunded pension debt stands at a whopping $209 billion. And that’s not counting the debt for retiree health insurance, pension bonds or all local retirement debt.

[...]

Sadly, the past few years have shown what happens when large institutions face big challenges. When institutions are “too big to fail,” the federal government feels the need to swoop in and bail them out. And there’s already movement afoot for the next big bailout.

In his fiscal year 2012 budget, Gov. Pat Quinn said that “significant long-term improvements” to the state’s pension debt will come from, among other things, “seeking a federal guarantee of the debt.”

Source: Governor’s Office of Management and Budget

With local resources tapped out, more and more cash-strapped states will look for federal “aid” to help reduce their pension debt. A federal bailout of pensions might be great for states like Illinois and California, states that have failed to substantially reform their runaway pension costs, but what about those that have been more responsible with taxpayer dollars? Should they have to bail out other states’ pension systems? A federal bailout would reward failure, punish success and, ultimately, destroy the very federalist structure of our government.

To learn more about why a federal bailout of pensions is wrong for America, and how it could impact your state or county, visit NoPensionBailout.com.

In his typical witty manner, Zero Hedge’s Tyler Durden has more:

PIIGS In America: Is Illinois Preparing To Request A Federal Bailout?

Moments ago we saw the following amusing headline crossing the BBG:

• ILLINOIS TEACHERS’ PENSION FUND CUTS RATE OF RETURN TO 8% FROM 8.5%

It’s amusing because these are the same teachers who were demanding, and received, higher pay – 17% higher over four years in fact – following a several day strike. It is even more amusing considering that in a fiscal year in which we saw QE2, Operation Twist 1 and 2, and LTRO 1 and 2, the nation’s largest pension fund, Calpers, managed to eek out a measly 1% gain (and this is including the end of June surge following the then announced European bailout which turned out to be yet another dud). It is, however sadly, most amusing, because it may be a harbinger of something truly sad: the advent of the “PIIG bailout” to America, when a US state demands a Federal bailout. We have seen how eager Europe has been to bailout its insolvent nations. We are next about to see just how “united” the US is when its own solidarity is tested as state after state repeat the European bailout experience. But hey: at least we have the dollar so all should be well.

From the WSJ:

Now that Chicago’s children have returned to not learning in school, we can all move on to the next crisis in Illinois public finance: unfunded public pensions. Readers who live in the other 49 states will be pleased to learn that Governor Pat Quinn’s 2012 budget proposal already floated the idea of a federal guarantee of its pension debt. Think Germany and eurobonds for Greece, Italy and Spain.

Thank you for sharing, Governor.

…

Illinois now has some $8 billion in current debts outstanding and taxpayers are on the hook for more than $200 billion in unfunded retirement costs for government workers. By some estimates, the system could be the first in the nation to go broke, as early as 2018.

For years, states have engaged in elaborate accounting tricks to improve appearances, including using an unrealistically high 8% “discount” rate to account for future liabilities. To make that fairy tale come true, state pension funds would have to average returns of 8% a year, which even the toothless Government Accounting Standards Board and Moody’s have said are unrealistic.

The city is already facing upwards of a $1 billion deficit next year with hundreds of millions of dollars in annual pension costs for retired teachers coming due. But despite the fiscal imperatives, the negotiation didn’t even discuss pensions. The final deal gave unions a more than 17% raise over four years, while they keep benefits and pensions that workers in the wealth-creating private economy can only imagine.

As a political matter, public unions are pursuing a version of the GM strategy: Never make a concession at the state level, figuring that if things get really bad the federal government will have no political choice but to bail out the pensions if not the entire state. Mr. Quinn made that official by pointing out in his budget proposal that “significant long-term improvements” in the state pension debt will come from “seeking a federal guarantee of the debt.”

So when the time comes to bail out Chicago we can just tell America’s insolvent state(s), who will soon pursue the MAD strategy of Europe’s PIIGS, to demand a bailout with the ECB. We are confident the ECB will be more than happy to comply: after all quite soon Mario Draghi will realize that his goal should be to push the EUR down not up, and taking on more and more bailouts and money printing is precisely what he should be doing to once again retake the lead in the global FX race to debase.

After all, as it was already made clear earlier, Obama’s promise in exchange for European votes, is to bail out Europe. It is only fair that Europe reciprocate after the election.

Quid pro quo.

And now: the End of the Beniverse

Source:Zero Hedge

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