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Illinois Sells Bond to The Sharks

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Illinois can’t fund its pensions.  As a matter of fact, it hasn’t contributed money to state pensions in years. Not only that, when it published state budgets, Illinois failed to discount the pension liabilities back at a realistic discount rate-hiding the actual magnitude of the liability.

Both political parties are at fault, but the Democrats have had iron clad control on the state for the past 8 years.

Smoke and mirrors at it’s best.  Houdini budgeting.  What ever you want to call it, it’s dishonest at best-more likely criminal if Illinois were a publicly held corporation.

For all the people that hate hedge funds, they ought to go to church and light a candle to them today.  Illinois couldn’t issue debt to cover pension liabilities in the regular marketplace.  Instead they had to go to hedge funds and privately place the debt.

They needed to sell $3.7 billion in debt to cover pension obligations.  They paid 2% more than they normally would have had the state been fiscally sound.  Just to give you some idea of how big 3.7 billion is, it was the value of Twitter in December of 2010.  This means that Illinois will pay extra interest over the life of their loan.  It is worth noting that last year when Illinois issued bonds, the rate was 4.42%.  This rate is a little more than a half a point higher adding to costs.

Interest rates are at historical lows.  Imagine what will happen to the cost of debt when the interest rate goes higher!  The Federal Reserve cannot maintain a 0% interest rate policy indefinitely.  Since Illinois can’t tap the traditional debt market for muni debt, they will have to answer to their new master; hedge funds.  What is next after them?  Sovereign Debt funds?  Maybe Illinois can sell out the whole state to Singapore or China.

The bonds are five year bonds.  How much you want to bet that Illinois can’t pay them off in five years without selling off assets?

Read more at Points and Figures


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