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I'm new here so I'm not sure if this type of question is appropriate on this site.

I live in the EU (Italy) and I'm quite concerned (probably not the only one now in EU) about the possibility of some country (maybe mine GDP/DEBT 120%) to go into default or very close to it.

Before asking this question I tried to sort it out by myself reading these very interesting q/a:

But I could not come to an answer. In Italy is the 1st time we have one currency for all EU states. I think in the past when we had Lira the government would avoid default by simply devaluating the currency, but I suppose one EU country can't decide on its own to do devaluate a currency like Euro that is common to all other countries.

Here Frazell Thomas says: "A similar reality happens in the United States with some level of regularity with state and municipal debt being considered riskier than Federal debt (it isn't uncommon for cities to default)."

But do you know about a US state risking to go default now or in the past? I'm very confused do US single states like IOWA have debt and emits obligations on their own like Italy does in EU?

Oh, and just another little thing I would like to know, is Dollar a fiat currency too like the Euro?

Thanks in advance for any answer.

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Marco Demaio
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US or EU states are sovereigns which cannot go bankrupt. US states have defaulted in the 1840's, but in most of those cases creditors were eventually repaid in full. (I'm not 100% sure, but I believe that Indiana was an exception with regard to costs incurred building a canal system)

The best modern example of a true near-default was New York City in the late 1970's. Although New York City isn't a state, the size and scope of its finances is greater than many US states.

What happened then in a nutshell:

  • The hapless city administration begged for a bailout; the Feds and eventually New York State said no.
  • The city became insolvent and was nearly unable to meet it's obligations.
  • The Governor (Gov. Carey) devised a plan where the NYC teacher's union provided an infusion of $150M from its pension to keep the city afloat.
  • The State imposed a fiscal control board that approved all city spending for many years in exchange for a restructuring of debt guaranteed by the NY State government.

Basically, a default of a major state or a city like NYC where creditors took major losses would rock the financial markets and make it difficult for all states to obtain both short and long term financing at reasonable rates. That's why these entities get bailed out -- if Greece or California really collapse, it will likely create a domino effect that will have wide reaching effects.

duffbeer703
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But do you know about a US state risking to go default now or in the past?

Ultimately, a US state could go into default. However, I doubt that such a scenario would be allowed to transpire.

This seems to happen to California with some regularity. That is, risking default. What would happen is not quite well known:

"There is no provision for a state to go bankrupt," Kyser said. "I don't think anyone really knows what will happen or even if the state will go into receivership if it does default. I can tell you this, officials are looking at all the (current) laws." (source)

I believe that the answer to your question is that it could happen, but likely would not be allowed to occur. The nature of the EU and US are quite different. The individual states forming the US are not separate nations. For better or for worse, the US is a stronger federation than the EU. (Something that is lamented at times when the Feds mess with the purview of the locals.)

George Marian
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But do you know about a US state risking to go default now or in the past?

In 1847 four states - Mississippi, Arkansas, Michigan, and Florida - failed to pay all or some of their debts. All of these states had issued debt to invest in banks. From the detailed source listed below: "...it should be remembered that all cases of state debt repudiation, as contrasted with mere default, involved banks." Jackson had killed the federal central bank 10 years earlier and the states were trying to create their own inflationary central banks. Six other states delayed debt payments from three to six years (source, page 103, this source has more details). This is the only case I know of where US states defaulted. US cities default more frequently.

I'm very confused do US single states like IOWA have debt and emits obligations on their own like Italy does in EU?

Yes. Individual states can issue their own bonds.

Oh, and just another little thing I would like to know, is Dollar a fiat currency too like the Euro?

Yes, the US dollar is a fiat currency. I think the better question is: "Is there any currency that is not a fiat currency?"

Muro
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