(Reuters) - Legislation that would allow U.S. states to file for bankruptcy will likely be introduced in Congress within the next month, Newt Gingrich, the former speaker of the House of Representatives and a powerful Republican party figure, told Reuters on Friday.
Although Gingrich, considered responsible for the "Republican Revolution" of the 1990's, is no longer in office, he has deep ties to Congress and is frequently named as a potential presidential contender in 2012.
For months he has championed letting states file for bankruptcy in order to handle their long-term budget problems despite resistance from states and investors in the $2.8 trillion municipal bond market.
"We're faced with the danger that the states are going to try to show up and say to Washington: You have to give us money," Gingrich said. "And I think we have to have an alternative that allows us to say no."
While he declined to comment on who might introduce legislation, Gingrich said there was support in both the House and the Senate. He said lawmakers have been looking into the idea for three or four months.
Gingrich first publicly broached the idea in November, the same month the Republican party won control of the House in mid-term elections, largely on promises of reducing spending.
But the legislation will likely face an uphill battle with Democrats still in control of the Senate and the White House.
Because states are sovereign, they cannot declare bankruptcy as cities can, and most have provisions in their constitutions that make defaulting on debt next to impossible.
And California -- a state which Gingrich said would likely turn to Congress for financial help along with New York and Illinois -- said on Friday it has no interest in using bankruptcy to solve its fiscal problems.
California, the eighth largest economy in the world, would not benefit from the legislation, Treasurer Bill Lockyer said.
"States didn't ask for it. We don't want it. We don't need it," Lockyer said. "Bankruptcy would devastate states' ability to recover from the recession and make the infrastructure investments that create good jobs."
Struggling to close a $25 billion budget gap, California already holds Moody's Investors Service's lowest state credit rating -- a distinction it shares with Illinois.
"Just the availability of a bankruptcy option and the potential bond default could severely damage state credit ratings and destroy the trust of bondholders," said New York State Comptroller Thomas P. DiNapoli.
Last week, the municipal bond market suffered a sharp sell-off on fears of defaults by cities and other issuers.
Representative Xavier Becerra, a member of the House Democratic leadership, said the bankruptcy idea is not new.
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