If Uncle Sam Defaults...

money belt tightensIf Democratic and GOP lawmakers can’t reach a compromise to raise the debt ceiling, the federal government won’t be the only one that has a problem paying its bills. Markets are likely to take a hard look at all state and local governments with a cash flow problem.

“The main effect would be in municipal bond markets, most likely.”

Stephen Craig teaches public economics at the University of Houston.  He says Houston is particularly vulnerable because of the large amount of debt the city took on under Mayor Bill White.

“Clearly things that make our city government more expensive are bad for the city’s economy. Since we’re a highly indebted municipality, then if our credit gets more expensive, our expenses will go up more than average.”

Investor ratings service Moody’s warned last week that unless Congress and the White House make progress toward raising the debt limit soon, it will place the U.S. under review for a possible downgrade sometime in July.

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