(Bloomberg News) U.S. municipal-bond investors can expect about $100 billion of defaults over the next five years, according to a consulting firm co-founded by Nouriel Roubini, an economist who predicted the credit-market collapse.

State and local debt problems won't "infect" the financial system, though they "will dampen economic recovery," Roubini Global Economics LLC said in a report dated Feb. 28.

The study is a less-dire outlook for the $2.9 trillion state and local government bond market than that of Meredith Whitney, a bank analyst. She said "hundreds of billions" of dollars of defaults could happen this year as state and local governments cope with budget deficits and tax collections that haven't returned to pre-recession levels.

The Roubini report said defaults of $100 billion, a figure it called a pessimistic calculation, may produce investor losses only of about $35 billion because of the historically high rate of principal repaid on distressed municipal bonds.

"State and local debt problems are not systemic in nature, and will not infect the financial system," David Nowakowski, director of credit strategy for the New York-based firm, said in the report co-written with Prajakta Bhide, a researcher.

Speculation about a wave of defaults by cash-strapped local governments prompted investors to pull money from municipal-bond mutual funds for the past 15 weeks. Spending cuts by state and local governments also contributed to a revision lower of U.S. gross domestic product growth in the fourth quarter.

Lower Expenditures

The economy grew at a 2.8% annual pace in the period, down from a 3.2% initial estimate, as state and local expenditures fell at a 2.4% annual rate, the Commerce Department said Feb. 25.

Roubini's firm is the latest to cast doubt on Whitney's forecast. Public officials, investors and rival analysts have said her view exaggerates the risk that the slow-growing economy poses to the municipal-bond market.

"Ultimately, municipal bankruptcies will be at a lower level," Bill Gross, who manages the world's biggest bond fund at Pacific Investment Management Co., said on Bloomberg Television's "In Business" program in January. "I don't subscribe to the theory that there will be lots of them."