The top story at Zerohedge for the past 16 hours has been that of the imminent collapse of Illinois’ finances. The Republican Governor and the Democratic Legislature refuse to budge on needed budget cuts. Meanwhile the Comptroller, Susan Mendoza, is running out of ways to satisfy court orders to pay the massive $15 billion in back bills.

“I don’t know what part of ‘We are in massive crisis mode’ the General Assembly and the governor don’t understand. This is not a false alarm,” said Mendoza, a Chicago Democrat.
“The magic tricks run out after a while, and that’s where we’re at.”
As AP sums it up, “it’s a new low, even for a state that’s seen its financial situation grow increasingly desperate”, a state which has a website dedicated to tracking the daily amount in overdue bills…

But, the money shot for this article comes at the end where the Comptroller laments not being able to print money to cover the shortfall.

And that’s the good news and the reason why the U.S. is in a far better fiscal situation than the EU is. States in the U.S. cannot issue debt and print currency like the member nations of the EU. There you have 17 ‘states’ all with equal ability to issue euros willy-nilly. And because of the inherent put-option of the central bank back-stopping that debt the value of that debt is vastly inflated over its risk profile.

Add to this the ECB’s current $65 billion per month asset purchase program otherwise known as QE or, more accurately, profligate helicoptor money printing (!), the bubble in European debt instruments is far larger than anything brewing in the U.S.

Illinois will declare bankruptcy. The Republican congress will not bail them out. It is their guy standing firm to get the waste cut, while the Democratic legislature grandstands on social services and corruption that have caused this situation in the first place.

The Fed is not allowed to bail out the states, directly. It can bail out the creditors but only those authorized to access the Fed’s discount window. And your average construction firm is not privy to that.

We’re not talking about the banks being bailed out for blowing a bubble in housing debt here. This is simply a case of a state biting off way more than it can chew and the Fed helping this along by keeping interest rates so low for so long, distorting the risks to muni bond investors.

But, in the end, this will resolve itself with a lot less pain than it will in Europe. Because the limit of debt saturation for U.S. states like Illinois, New Jersey, California and New York is a lot lower than it is for countries like Spain.