Concerns Over 2011 Bankruptcies and Defaults May Be Exaggerated

A report released by the Federal Reserve Bank of Chicago shows that worries about mass defaults and bankruptcies during 2011 may be overblown.

Richard Mattoon, a senior economist and author of the letter, did confirm that counties, cities and other local governments are facing problems like sinking property values and underfunded pensions in 2011. Yet, "if history is any guide, few local governments will either default on their own or end up in bankruptcy." He provided a list of alternatives that included taking intermediate corrective budget actions and tapping reserve funds.

After rumors of financial meltdown started to permeate the proper sources, individual investors have been running away from the muni market. The U.S. municipal bond funds reported a 22-straight week run of sizable net outflows. This came after Meredith Whitney, a Wall Street analyst, made the famous predictions that 50 to 100 local governments would default, amounting to losses in the hundreds of billions of dollars.

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