Prevent Your Bonds From Becoming a Greek Tragedy

It is common sense for everyone to have an annual physical examination. This is a preventive measure to detect early signs of potential health problems. Now what about our financial health? Uncommon sense recommends a yearly checkup for signs of problems with our city, state and county bond holdings. Interest paid on these was free from tax and the principle was guaranteed. Is that fact or fiction?

Prudent asset stewards should immediately investigate to see if their bonds are Greek-style cooking. First, check the current balance sheet. Then it is crucial to examine the projections for revenue versus obligations. Recently the State of California was informed by court order that its budget cuts cannot be compromised, resulting in financial chaos.

Have the referees from the three major rating companies swallowed their whistles? At a minimum they should be warning bond owners of potential stormy weather. Because many cities and counties did not carry super credit ratings they paid insurance premiums to third parties to guarantee principal and interest. The result was less interest paid out on the bonds. Now it appears that current bond rating personnel are unable to see the color signifying danger – red. They only see the primary color of greed and paper currency – green.

Can your bonds survive a stress test? How stable is the health of your bond insurance company? These are relevant and timely questions considering that more than half of our states have larger economies than Greece’s. Look at the Greek tragedies cooked up and served as nutritious but exposed five to ten years later as poison.

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