Refinancing massive government debt: More debt crises ahead?

With Greece’s near-bankruptcy and death watches on for Europe’s other “PIIGS” (Portugal, Ireland, Italy, Greece and Spain) — not to mention Great Britain’s failing finances — The New York Times reports on the horrible financial health of U.S. states:

California’s stated debt — the value of all its bonds outstanding — looks manageable, at just 8 percent of its total economy. But California has big unstated debts, too. If the fair value of the shortfall in California’s big pension fund is counted, for instance, the state’s debt burden more than quadruples, to 37 percent of its economic output…

Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of the 50 states’ pension obligations the way the bond markets value debt. They put the number at $5.17 trillion.

After the $1.94 trillion set aside in state pension funds was subtracted, there was a gap of $3.23 trillion — more than three times the amount the states owe their bondholders.

This state debt burden sits atop the already massive federal debt, thanks to decades of high spending and low taxes. Republicans tarred Democrats as “tax-and-spend” …but were more fiscally irresponsible. Republican presidents ran up most of the federal debt, behaving like “spend-but-don’t-tax"ers.

Posted by James on Tuesday, March 30, 2010