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Today Illinois bonds were downgraded to 1 above junk. The article. Citation from article:

Despite the lack of a budget, Illinois has continued to cover payments due on its bonds, and, like other states, has no ability to resort to bankruptcy to escape from its debts. A downgrade to junk, though, would add further financial pressure by increasing its borrowing costs and preventing many mutual funds from buying Illinois’s securities.

If "Illinois cannot go bankruptcy", is it safe to buy its bonds and wait until they mature?

After reading your 4 answers, I learned that Illinois can default without going bankrupt. If they do that what do I (and other bond holders) do? My understanding is that without bankrupt, Illinois will owe me the money forever. Can I sue Illinois and ask Illinois to sell building, lands and rise taxes to pay me back?

Has any state in USA ever declared bond default in the past?

Tony
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4 Answers4

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"Can't declare bankruptcy" isn't the same as "can't default". Bankruptcy is a specific legal process for discharging or restructuring debts. If Illinois can't declare bankruptcy, that means it will still owe you the money for the bonds no matter what, but it doesn't guarantee that it will actually pay you what it owes.

If Illinois should run out of money to pay what's due on its bonds, then it will default. Unlike the federal government, Illinois can't print money to make the payments.

Nate Eldredge
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If Illinois cannot go bankruptcy

This is missing a few, very important words, "...under current law."

The United States changed the law so as to allow Puerto Rico to go into a form of bankruptcy. So you cannot rely on a lack of legal support for bankruptcy to protect any bond investments you might make in Illinois. It is entirely possible for the federal government to add a law enabling a state to discharge its debts through a bankruptcy process. That's why the bonds have been downgraded. They are still fine now, but that could change at any time.

I don't want to dive too deep into the politics on this stack, but I could quite easily see a bargain between US President Donald Trump and Democrats in Congress where he agreed to special privileges for pension debts owed to former employees in exchange for full discharge of all other debts. That would lead to a complete loss of value for the bonds that you are considering. There still seem to be other options now, but they seem to be getting closer and closer to that.

Brythan
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If you give money to a person or entity, and they don't have the ability to pay you back, it doesn't matter if they are legally required to pay you.

Peter
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Sovereign immunity is the state's ultimate "get out of bankruptcy free" card. After all, the state has a hand in defining what bankruptcy even is in their state. Federal law is a framework, states customize it from there.

The state's simplest tactic is to simply not pay you. And leave you scrambling to the courthouse for redress. Is that an automatic win? Not really, the State can plead sovereign immunity, e.g. Hans v. Louisiana, Alden v. Maine.

You could try to pierce that sovereign immunity, essentially you'd be in Federal court trying to force the state into bankruptcy. This would pit State authority against Federal authority. The Feds are just as likely to come in on the state's side, and you lose. Best scenario, it's a knock-down drag-out all the way to the Supreme Court. You would have to be one heck of a creditor for the legal fees to be worth your trouble.

States don't make a habit of this because if they did, no one would lend money to them, and this would be rather bad for the economy all around. So business and government work really hard to avert it. But it always stands as their "nuclear option".

And you gotta know that when loaning money to States.

Harper - Reinstate Monica
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