Meredith Whitney, CEO, Meredith Whitney Advisory Group LL
Meredith Whitney, CEO, Meredith Whitney Advisory Group LLC Reuters

Analyst Meredith Whitney, who has faced enormous criticism over her dire warnings about the likelihood of up to 100 U.S. municipalities defaulting this year, reiterated her call. She further warned that when the defaults commence, the muni bond market will witness a massive exodus.

Whitney, founder and president of the Meredith Whitney Advisory Group, told CNBC when you have the first group of defaults you will see indiscriminate selling that would be a buying opportunity for some. Because there has been such complacency in the market and muni investors have been frankly talked down to for so long… they'll just fly.

Bond experts, including Bill Gross of PIMCO, have commented that such a magnitude of defaults is unlikely.

However, Whitney explained that the fragile state of municipal governments justifies her call on defaults, citing that a daisy chain of financing from the federal government to state and local governments will not hold up anymore.

Further, Whitney cited that the state of Michigan has similarly warned that “many municipalities” will go bankrupt this year. The governor of New Jersey, Chris Christie, has also made similar dire predictions, she added.

“States across the board are spending far more than [what they earn],” she said. “The budgets for 2012 are expected to be the most difficult budgets to rationalize, [with] structural deficits at the state level. Issuance of BAB [Build American Bonds] have run out. Federal stimulus has run out.”

Whitney recommends that investors proceed with extreme caution on muni bonds.

You have to know what you own,” she said. “You have to really do your homework in terms of knowing what supports your bonds. There are great municipal investments out there, but on a blanket basis you have to be really careful about knowing what cash flows are supporting your investments.

Whitney became famous when she correctly predicted that Citigroup (NYSE: C) would suffer immensely from the collapse of the subprime mortgage industry just prior to the global credit crisis.