US PENSION FUNDS AT THE EDGE OF A CRISIS

At the expiry of midnight on Friday, Illinois failed to finalise a budget and with unpaid bills amounting to US$15B, it is effectively an insolvent state.

Besides Illinois, Maine, Connecticut and New Jersey are also underfunded. Not to forget that Puerto Rico, a US territory recently declared bankruptcy.

Just how bad is the under funded situation is in the US. The major under funding is of course pension funds and the map below best illustrates the scenario (source: Zerohedge)

If anything it showed the worst is yet to come.

Besides pension funds, lack of funding will impact upon other entitlements, government agencies and public services.

Not only are the states facing a pension crisis, GE recently revealed that their pension funds is underfunded by US$31B. What happened to the prior borrowings? Oh, wait... they were used to fund share buybacks so that the management can cash out their share options with a profit.

Now, they have to pay interest on additional borrowings and at a higher rate too!

About US$3T of public and private pension funds are invested in the stock market just as when margin debt is at record highs. A small correction could translate into a cascading waterfall effect.

Look out for more negative news coming out of the states. I believe, they could impact the US$ negatively.

In the coming days rating agencies could rate Illinois debt as junk, and as more states are put on rating watch, it could impact upon the stock market.