President Barack Obama’s stimulus plans will keep broken cities and municipalities afloat but only temporarily, so bondholders financing those towns might have to brace for defaults, says publisher and former presidential candidate Steve Forbes.

“Many observers think it's inconceivable that a state, large county or city would be allowed to default on its bonds,” says Forbes, editor-in-chief of Forbes magazine and CEO of Forbes Inc.

“But unless the Federal Reserve oversteps its bounds and funnels money to strapped governments, municipal bond markets will indeed face the unthinkable.”

For Forbes, many local governments might have to follow the example set by New Jersey Governor Chris Christie, a Republican who got a Democratic legislature to cut spending.

Christie also capped property tax increases and fought to manage pension obligations.

Those policies, Forbes writes in his column, will save municipal bonds, as “there's no moral reason that our recession-hit population should have to subsidize what clearly is excessive spending or public pension plans.”

“Some municipal bondholders may experience some sleepless nights, and a few may actually suffer losses in principal. But the wave of fiscal reform that's coming will actually strengthen the long-term viability of most public debt.”

Municipal bonds have historically been a safe investment venue amid uncertainty, although tough economic times are crimping tax revenues, thus making it hard for municipalities to pay their debts.

“It is the most risky time for munis since the Great Depression,” Brian Fraser, a partner at the law firm Richards, Kibbe & Orbe in New York, tells the Pittsburgh Post-Gazette.

“You have to look closely at what kind of issuer is issuing the municipal bond. The smaller the issuer, the more likely they are to default.”

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