Historically, what have been the causes of municipal bankruptcies?

Question

What will be an ideal response?

Answer 1

Municipal bonds are viewed as having little default risk. Moreover, cumulative default rates and recovery rates for investment-grade municipal bonds are better than for comparably rated corporate bonds. For example, according to Moody's, over the period of 1970 to 2005, the
10-year cumulative default rate was 2.23% for corporate bonds compared to 0.06% for comparably rated municipal bonds. Moreover, Moody's also reports that the average recovery rate was only 42% of par for corporate bonds that defaulted compared to 66% for defaulted municipal bonds.

Spiotto provides a history of municipal bond defaults as well as the causes and nature of defaults. These include:

Economic conditions: Defaults caused by downturns in the economy and high interest rates.
Nonessential services: Revenue bonds issued for services whose service was no longer needed.
Feasibility of projects and industries: Revenue bonds are issued after a feasibility study for
a project is completed. The feasibility study may have been too optimistic with respect to the demand for the project or the cost of completing the project.
Fraud: Municipal officials fail to comply with the terms of the relevant documents.
Mismanagement: Inability to successfully manage a project.
Unwillingness to pay: A municipality may simply be unwilling to pay (i.e., repudiation of the debt obligation).
Natural disasters: The impairment of a municipality's budget (reduction in revenue and increase in costs) may be the result of a natural disaster such as a hurricane.