Friday, Nov 06, 2009
The consequences of government defaulting on debt? Very little....
Harvard Blogs: The Coming Collapse of the Municipal Bond Market
Without bankruptcy protection, a city that couldn’t pay bondholders would be forced to raise taxes until it could. This happened to West Palm Beach, Florida in the Depression and property tax rates rose to 42.5 percent of assessed value. [Of interest to the LVT crowd!] Potentially bondholders might demand that the city hand over real estate to satisfy its debts. With bankruptcy protection, it is unclear what happens. If cities can walk away from debt they’ll have every incentive to declare bankruptcy and start afresh. There are no shareholders in a city to wipe out and therefore the only negative consequence of a bankruptcy filing would possibly be having to pay higher interest rates for future borrowing.
Posted by drewster @ 12:39 AM (335 views) Add Comment
1 Comment
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1. mark wadsworth said...
The figure of 42.5% is meaningless if we don't know what "assessed value" is. Rental value or capital value? Up to date or historic? Site-only or inclusive of bricks and mortar? If that's 42.5% of up-to-date site-only value, then whether you take rental value or capital value it would be perfectly affordable. If it is 42.5% of historic total capital value then of course it is too high.
(for comparison, we're paying on average nearly 50% tax on our incomes on most advanced countries and it still hasn't killed us off completely.)