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The Detroit Contagion Spreads

Detroit Struggles To Re-Build A Bankrupt City Amidst Poverty And Blight

Thanks to Detroit’s bankruptcy, the state of Michigan has just seen its lowest level of bond sales in more than a decade, says Bloomberg. More and more municipalities have joined Saginaw County and Battle Creek in postponing bond sales for more favorable times, and interest rates are climbing for the cities that are still borrowing. The situation is now so bad that it could stop Michigan’s promising economic rebound in its tracks:

The postponed projects and higher borrowing costs threaten to halt economic gains that have led Snyder to call Michigan the Comeback State. Since the 18-month recession ended in June 2009, Michigan has had the second-best economic growth among U.S. states, trailing only North Dakota, according to the Bloomberg Economic Evaluation of States. […]

The extra yield investors demand to hold Michigan general obligations relative to benchmark munis tells a different story. The eighth-most-populous state’s 0.55 percentage point yield spread over top-rated debt is second-most among 17 states tracked by Bloomberg, behind Illinois. Michigan pays more to borrow than California, even with an S&P rating two levels higher.

This should serve as a reminder to the rest of us why America’s public pension crisis is so serious.

[Remnants of Detroit’s historic Eastown Theatre are seen on September 4, 2013 in Detroit, Michigan. Photo courtesy of Getty Images.]

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  • cubanbob

    Why is this a bad thing? If it results in lower borrowing it simply means capital is being allocated elsewhere-to better yielding projects.

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