Should States Be Allowed To File Bankruptcy?-Ron Warnicke-Gordon Silver

(Investors.com) No bill has been introduced. But state chief executives say even the idea could raise debt costs and exacerbate fiscal woes.

"The mere existence of a law allowing states to declare bankruptcy only serves to increase interest rates, raise the costs of state government and create more volatility in financial markets," the National Governors Association said in a statement before last weekend's annual meeting.

Municipal bond mutual funds had a $38.7 billion outflow in the last 14 weeks, according to Bond Buyer.

Utah Gov. Gary Herbert, chairing the group's economic development panel, said at the meeting that default talk stems from "incomplete and inaccurate information" and is inflammatory.

"It's absurd," said Maine Gov. Paul LePage. "The last thing I want to do is have the markets contemplating that states are about to go bankrupt."

Governors have a message to congressional Republicans working to craft a state bankruptcy bill: You're killing our credit ratings just by talking about this.

The sharp recession and soaring retiree benefit costs have states in short- and long-term pickles. The struggles of governors like Wisconsin's Scott Walker and others to get their budgets under control illustrate the problem.

Many GOP lawmakers believe that inevitably some states will come begging for a bailout like GM (GM). So they've been quietly discussing giving them a managed bankruptcy option.

Gordon Silver bankruptcy attorney Ron Warnicke says certain criteria need to be considered before a plan could be made. A State bankruptcy would be infinitely more complex than a municipality chapter 9 for example.

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