Meredith Whitney: States to Be Bailed Out Within 12 Months

Mark the date: September 30 2010. Meredith Whitney, of Citibank doom fame, says next to be bailed out are the U.S states themselves - within 12 months.

"The U.S. government will face pressure to bail out struggling states in the next 12 months"

"...local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable".

She is not alone. She joins Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and

“People will think the federal government will bail these states out,” “It’s going to be an incredibly divisive issue.”

 She released a report rating the financial health of the 15 largest U.S. states measured by GDP, it is reported to ranks:

• Worst state: California
• 2nd worst states: New Jersey, Illinois and Ohio (tied)

Four criteria were used the economy, fiscal health, housing and the flexibility to raise taxes. 

Ms. Whitney also says that from 2000 to 2008 states increased their spending by 60%, but their revenue base increased by only 45%.

“You take on more leverage to avoid long-term pain,”

She adds that U.S. states won’t default, "instead, they will cut aid to local governments, putting them at greater risk. [...] local governments get one-third of their revenue from state transfers".