The Wonk

“Consider this hypothetical: Illinois, already paying higher interest rates than other states because of its debt load and dysfunctional politics, runs into serious trouble paying its debts. Ratings plunge; worries mount. What happens to the yield investors demand to lend to Ohio? Look at Europe, and the answer seems clear: Trouble in one place with a lot of debt pushes up borrowing rates for others with a lot of debt. But that isn’t what has happened in the U.S., according to a new International Monetary Fund working paper. Examining the ups and downs of 10-year municipal debt from 2005 through early 2011, it finds that an increase in borrowing costs in one state generally results in lower borrowing costs in others, the opposite of the spillovers so evident in Europe.”