Dizzy from '08, U.S. muni market looks to '09

By Karen Pierog and Lisa Lambert - Analysis

CHICAGO (Reuters) - The municipal bond market is facing dramatic changes in 2009 following a series of developments in 2008 that shook investor confidence and hurt issuers' ability to raise needed money.

Retail investors instead of institutions are now in the buyside drivers seat.

"We're basically expecting that muni issuance will be at whatever level retail demand can meet," Phil Fischer, a muni strategist at Merrill Lynch & Co. MER.N, said about 2009. "It's a very different market."

Tax-exempt issuers will need major help to stay afloat.

"We need relief like a reversal in the economy or a handout from Uncle Sam," said Richard Ciccarone, a managing director at McDonnell Investment Management in Oak Brook Illinois, referring to federal help for states and local governments.

Without some help or change on the economic front, Ciccarone said more municipal bankruptcies and bond defaults may be in the cards.

In the second half of 2008, Fischer said he realized that problems in the muni market were not isolated events, but part of a fundamental shift in how tax-exempt bonds are bought and sold.

"This is about as radical a change we've seen," Fischer told Reuters.