THURSDAY FEBRUARY 11, 2010

Declaring Fiscal Emergency

This morning, the newly elected Governor of New Jersey, Chris Christie, declared a "fiscal emergency" and announced a series of spending cuts intended to close a $2.2 billion budget gap.  New Jersey is not alone.  Fiscal emergencies are occurring around the globe.  Lately, Greece has taken the forefront.  However, the entire southern tier of the European Union (Portugal, Spain and Italy) are in a similar distressed state.  In the U.S., California, New York, Illinois and Michigan, like New Jersey, are on the brink of insolvency.  Even the United States' fiscal well being is in question.

The problem for all of these entities is that they are already relatively high tax regions.  It will be difficult to significantly raise taxes to solve the problems.  Therefore, there is only two ways to fix the deficit problem: increase revenue through growth and cut spending.  Unfortunately, growth takes time, even in good economies.  Therefore, spending reduction is the most likely answer, at least in the short term.  However, this is easier said then done.  Witness Greece,  where there are already labor strikes protesting the "draconian" cuts despite the near collapse of its economy.  While the short-term fix in Greece may be an EU "bailout", it hardly solves the long-term underlying problem of chronic spending and deficits.  Similarly, in the U.S., we have seen the Governator of California seeking federal support.

What does this all mean for investors?  In my opinion, higher interest rates!  As we watch the world's feckless politicians at work, confidence is eroding.  The credit risk of investing in sovereign debt, whether municipal, U.S. Treasury, or foreign government, is increasing.  This means higher rates.  Bond buyers beware.   

POSTED AT 1899-12-30 12:04:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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