Government Bonds Aren't That Reliable

Wednesday March 12, 2008

Cate Long blogs a story about how local governments are looking for a more favorable bond rating. In short, municipalities are held to a higher standard. Yesterday’s Los Angeles Times echoed this sentiment, as states demand ratings reflecting their financial position. In recent years, bond issuers would purchase insurance from highly rated insurers to guarantee an issuance with a AAA rating. But with bond insurers ratings being cut, municipalities want off the hook and a higher rating.

They shouldn’t be. Governments have a tendency to respond to popular demands rather than sound financial wisdom. When push comes to shove, elected officials will fold quicker than a private concern to popular demands for income cuts and expense increases. The Federal government exemplifies this behavior and it is a form of political risk that private concerns are simply not subject to. As a result, municipalities, states, and sovereigns do need to be held to a higher standard.