Detroit may have the court’s approval to officially declare bankruptcy, but the city’s creditors—both pensioners and bondholders—have been challenging every step of that process.Most of the opposition comes from the city’s bondholders, who are unquestionably getting a worse deal than pensioners: 20 cents on the dollar. The pensioners will see steep benefit cuts too, but not nearly as steep. The largest possible cut is 34 percent, and some may see losses as low as 4 percent.But for many pensioners, even these modest cuts are too much. One group announced plans to protest the plan by “shutting down the city” (although this is more publicity stunt than serious threat).Clearly, nobody is particularly pleased with the deal they might be getting, but as the Economist notes, Detroit may have divided the opposition enough to prevent a successful challenge from either direction:
The fact that some groups are doing far better than others sets the stage for some to approve the deal. This, in theory, allows the judge to impose the deal on other creditors—a “cram down”, as it is called. In fact, if either class of pensioners rejects the deal, even a cram down cannot force it through.Bondholders are particularly furious that they are being offered so much less than pensioners. But no one seems to care much what happens to them. On the frozen streets of Detroit this week, it was the old folk citizens felt sorry for. But they also knew there was nothing else to be done.
At this point in the process, Detroit’s bankruptcy fight may consist mostly of public posturing and legal battles, but that doesn’t mean the important part is over. Who comes out on top could decide the future not only of this city, but all the other struggling cities around the country. Everyone is watching this battle closely and planning their next moves.