Fiscal Crises Hit Closer to Home - Up and Down Wall Street Daily - R. Forsyth - Barrons.com

Q&A - CAN STATES DEFAULT? Fiscal Crises Hit Closer to Home - Up and Down Wall Street Daily - R. Forsyth - Barrons.com:

This information is too valuable not to send to my blog - as many seem to think states can't default. (Thanks to Paul Esch)

"There probably will be state defaults, despite state constitutional provisions specifying that debts must be paid. The California Constitution already states that full funding of education is a higher priority than debt service.

Does anyone want to bet that the California courts would resist the temptation to declare the 'public health and safety' (a marvelously flexible term) is not a higher priority than debt service?

If the California courts decide to let the state welsh on its debts, the following text of the 11th Amendment to the US Constitution, ratified in 1795, tells us precisely what recourse creditors will have.

'The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.'

Chapter 9 of the US Bankruptcy Code only applies to municipalities and political subdivisions of the states precisely because the 11th Amendment forbids any legal action against the states by federal courts.

Readers, please do not state that this amendment is purely theoretical, and that no state has ever defaulted. Mississippi defaulted on its state debt after the Panic of 1837, and never paid its crediors anything. Sovereign immunity is alive and well in the United States."