Like Greece and Ireland, US states and municipalities cannot print money, and so have no choice but to cut spending, raise taxes, or renegotiate the debt. Ultimately we expect a combination of all three. The uncertainty of this outcome has driven down municipal bond prices and is comparable to the European sovereign bond crisis, with the higher-risk state and local municipalities becoming increasingly differentiated from their better managed, more frugal counterparts. We recognize that the municipal market can become illiquid in times of uncertainty, leading to considerable price volatility, and are unwilling to step in at this time. Detailed credit analysis will be required, and the outcomes are still very uncertain.

David Fuller's view Don't miss the important graph on page 2.

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