There is no provision in Federal bankruptcy law for a state to declare bankruptcy. See Cyprus, Greece, and student loans to see how that plays out.
Whoever controls the Federal apparatus (President, Congress, and various courts) will have huge leverage over Illinois, California, and other states as they come, hat in hand, begging for help. Bond holders are likely to end up as bag holders.
“Whoever controls the Federal apparatus (President, Congress, and various courts) will have huge leverage over Illinois, California, and other states as they come, hat in hand, begging for help. Bond holders are likely to end up as bag holders.”
We have avoided State and local city/county bonds for about a decade due to this potential issue.