Will regional governments go the way of Greece?

Liz Goodwin

Local governments in California and New York scrambling to meet ballooning pension and budget deficits are reminding spooked investors of Greece's crippling debt crisis, the Financial Times reports today. And that's not a good thing for their borrowing chances.

Already rattled by the debt crisis in Europe, investors are now demanding greater compensation for the risk they take on when they buy some kinds of municipal bonds (bonds allow local governments to borrow money to build things like bridges, schools, and courthouses). Investors, who flocked to muni bonds during the boom, now fear that cash-strapped municipalities will have trouble repaying their loans. That could make it more expensive for local governments to borrow, further squeezing their budgets.

Municipalities in California, Illinois, Michigan, and New York are among the most likely to go broke, senior adviser at Credit Suisse Securities Robert Parker told the paper. Local governments can file for bankruptcy, but if an entire state were to come to the brink, the federal government would most likely step in and bail them out.

Together, states face record budget deficits of $140 billion in the coming year, according to the Center on Budget and Policy Priorities. They will receive about $55 billion less in federal stimulus funds than they did last year.

These state and local budget shortfalls mean up to 400,000 public workers could lose their jobs next year, Mark Zandi, chief economist for Moody's Economy.com, told USA Today.