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Detroit's Last Hope to Avoid Bankruptcy


Detroit has been skirting bankruptcy for a while now, and today Emergency Manager Kevyn Orr met with the city’s creditors to discuss plans to restructure the city’s obligations. Creditors would have to take a hit on any such deal, but it’s stunning to see just how big it could be: The New York Times reports that proposals on the table would offer returns as low as ten cents on the dollar on more than $11 billion in liabilities and bonds. Unsurprisingly, Orr’s office is reporting that creditors will need a few weeks to think things over.

At this point, city creditors can either take the deal or force the city into bankruptcy proceedings, because it’s obvious that Detroit can’t pay back its debts, which amount to $25,000 per resident, according to the Detroit Free Press. It would be nearly impossible to plug a hole this large with spending cuts or tax hikes in a struggling city that has already slashed services to the bone and can scarcely afford to keep the lights on as it is. Mr. Orr is hoping that the city’s penury and the threat of bankruptcy will be enough to convince creditors to cooperate, and he may well be right—no city this size has gone bankrupt before, and the effects on the bond markets could be enormous:

Large cities in financial trouble — like New York and Cleveland in the 1970s and Philadelphia in the 1990s — have found other paths outside of bankruptcy court, he said, noting the powerful stigma, legal costs and unknown market repercussions that bankruptcy might bring.

“We don’t know with a municipality that size and that much debt what effect, if any, it will have,” Mr. Spiotto said, suggesting the uncertainty may be enough to scare creditors into a compromise. “It would be a change from what historically has happened, and we can’t rule out that there might be consequences.”

At the same time, however, a deal that cuts payments by as much as 90 percent would be a hard bargain for creditors. Further, Bloomberg reported last week that creditors are extremely resistant to cuts to general-obligation bonds, which have been assumed to be protected from loss. The details of the plan are still not clear, but city officials are dropping hints that it may not be able to make payments on these bonds.

The city must run a tricky path to avoid bankruptcy, and at this point, the obstacles are formidable.

[Detroit image courtesy of Shutterstock]

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  • Mark Michael

    This is an eye-opening announcement. Detroit has been viewed as a basket case for so many years that it’s almost just part of how things are. But the specifics of $11 billion write-down, potentially, a municipal bond market that historically has been relatively safe and fine for low-risk investors, now has a blow to it that might reverberate nationwide. I used to buy munis and more so “industrial revenue bonds” in the 1980s and early 1990s when I wanted to transfer cap gains from a rising stock market to a saver, income-producing investment. Hospital bonds, university building funds, and infrastructure projects. Yes, occasionally a small city or town went into default, but an insurance fund saved your principal for you – lost the interest payments for 2 or 3 years.

    I think with so many “blue” big cities failing to face up to their outsized pension obligations, too large public workforces, the whole muni market will be a lot riskier, and cities have lost a low-cost funding vehicle. Think Chicago, Philly, several more cities in California, some New England cities, NJ, RI, MD.

    Needless to say, I’ve not bought – or owned – a municipal or revenue bond for at least a decade. Don’t own any corporate bonds, either anymore. Just some TIPS that pay 2% inflation-adjusted interest; that’s it. (The long-term rates are finally heading up, so I’ll be watching when to resume some careful buying.)

  • USNK2

    I don’t think it feasible, but why not offer Detroit to the Palestinians for a homeland?
    They can annex Dearborn, UNRWA can pay the bills; and Buffalo, NY gets missile defense and new NSA installations.

    • Vadim Pashkov

      You can not offer Detroit to “Palestinians” there are no such people

      • USNK2

        Yes, so true. I intended a sarcastic solution to Detroit’s dilemma.
        How about moving the United Nations to Detroit instead?

  • ljgude

    A 90% haircut is serious business for creditors of a city in a first world country. I’m glad to see that the state government has had a mechanism that allows the ending to be negotiated. Too bad they couldn’t have stepped in earlier. Clearly malfeasance should be detectable before before 90% of the money is gone.

  • Bruno_Behrend

    If the pensioners don’t receive as big a haircut as the lenders, it’s not a fair deal.

    • Pete


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