New York mayor urges Obama to fix municipal bond market

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By Joan Gralla

NEW YORK (Reuters) - New York City Mayor Michael Bloomberg said he had advised President-elect Barack Obama's transition team to boost U.S. economic growth by fixing the credit markets so that cities and states can resume borrowing to build infrastructure projects.

That would revive the economy much more effectively than the first federal fiscal stimulus plan that the mayor, a self-made billionaire, said only amounted to a "blip" because all it did was spur flat screen TV purchases.

Bloomberg said the U.S. government should "promote" the insurance of capital projects, as long as a city, for example, is rated at least "A" by a credit rating agency. A single "A" rating is five notches below the highest rating of "AAA."

Several state governors also have told Obama that the federal government should boost aid so they could build needed roads, bridges and tunnels. This would create well-paying construction jobs, mirroring Depression-era public works projects.

The mayor offered no details, and the U.S. Treasury so far has rejected pleas by other politicians, including California's treasurer, to solve municipal financing problems.

In contrast, the U.S. government granted private banks the full backing of the Federal Deposit Insurance Corp for debt sales of up to three years maturity. Banks have seized on the opportunity, selling $37 billion of debt since the plan was launched last week in another attempt to thaw the corporate credit market.

Bloomberg said the federal government also should let borrowers tap the taxable municipal bond market to raise money to buy debt issued by states, cities, hospitals and the like.

This would let such players "make money on the spread," he said, but noted the U.S. Treasury would lose money as a result.

The federal government cracked down on such plays, starting about two decades ago, fearing underwriters were benefiting at the federal government's expense, especially with refundings.

Despite a series of bank bailouts, culminating in the $700 billion bailout, the municipal bond market is still depressed with investors interested mostly in super-safe U.S. Treasury debt. As a result, tax-free municipal bond yields have soared to historic highs of 50 percent or more above what taxable U.S. Treasuries pay.

Bloomberg noted the municipal market now must do without with bond insurers, which helped to shore up demand for these credits until some insurers, including Ambac Financial Group and Inc., lost their top credit ratings by expanding into risky subprime mortgages.

On Wednesday, the New York-New Jersey Port Authority joined the list of public borrowers locked out of the market. The agency. which helps oversee the World Trade Center redevelopment, was forced to postpone a $300 million note sale because no one bid on the debt.

For much of this autumn, U.S. states, cities, hospitals and turnpikes that sell tax-free debt have met with sharply differing receptions in the market.

California, which has perhaps the nation's worst budget problems last month halved a $523 million bond sale because institutions balked at buying the paper. The state is rated "A+" by Standard & Poor's, four notches below the top credit.

But top-rated Virginia recently said it was not having any difficulty selling its debt, though it was paying higher rates. Similarly, Pennsylvania, rated two notches below Virginia at "AA," says its ability to sell debt has not been impaired.

(Reporting by Joan Gralla)

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