Blog/Sovereign Debt Crisis
Posted Jun 12, 2020 by Martin Armstrong
Illinois became the first entity to borrow from the Fed’s new facility known as the “Municipal Liquidity Facility” for state and local governments. The Fed’s legal authority lies in section 13(3) of the Federal Reserve Act. This authorizes the Fed to directly lend to “individuals, partnerships and corporations” in “unusual and exigent circumstances.” Section 13(3) is titled “Discounts for individuals, partnerships, and corporations,” raising questions whether the Municipal Liquidity Facility is actually authorized under Section 13(3). This has been capped at $500 billion.
To qualify they need a credit rating which is always up for sale to the highest bidder as we saw in 2007. Illinois is already insolvent and its debt is trading at junk bond status. However, as long as they pay the fee, one of the credit agencies can certify a rating which is arbitrary so they get the funds for a kick-back. Welcome to the wonderful world of corrupt credit ratings. This proves that Illinois cannot hope to raise money to borrow. Someone should just turn out the lights.