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