FT – The US Treasury would provide a backstop to stricken states like California, which are struggling to raise debt, under legislation due to be introduced to Congress.
Proposals published on Thursday would see the Treasury acting as a reinsurer in the market and the Federal Reserve setting up bond purchase agreements, which were commonly provided by banks until the credit crisis. The changes present an even greater use of federal money and oversight into new areas of the market, with billions of dollars from the $700bn troubled assets relief programme – which has been used to buy stakes in banks and car companies.
Rating agencies would also come under pressure to improve state and local governments’ credit ratings, with the Securities and Exchange Commission tasked with checking that they are not assigning too high a risk of default compared with corporate bonds. Barney Frank, the Democratic chairman of the House Financial Services Committee, who supports legislation, said that he would hold hearings into the changes on May 21.
RCM Comment: This is a very serious development. The value of the US$ is in jeopardy. Even before this story broke the US$ value could be described as standing at a precipice looking into an abyss. Now, this story brings to mind the metaphor “the straw that broke the camel’s back”. We obviously don’t know what that straw will be that pushes the US$ over the edge, but the above story could certainly be the catalyst.