Municipal Bond Defaults Happen More Often Than Ratings Agencies Report

“After bank analyst Meredith Whitneyprophesied a wave of defaults by U.S. citiestwo years ago, many investors mocked herwhen her prediction failed to come true.

But Whitney may have been on to something. It turns out that U.S. cities have defaulted on municipal bonds much more often than credit ratings agencies have acknowledged, according to research by the Federal Reserve Bank of New York released on Wednesday.

Economists at the New York Fed found between 35 and 50 times more municipal defaults over the past few decades than ratings agencies have reported: Cities have defaulted on municipal bonds 2,521 timesbetween 1970 and 2011, while Moody’s has listed only 71 municipal defaults during that time period. And while S&P lists only 47 municipal defaults between 1986 and 2011, the New York Fed found 2,366 municipal defaults over that time period.”

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