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Detroit Defaults On Some Of Its Debts

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It will be interesting to see how Washington reacts to this. Detroit is bankrupt and many other US cities will have to follow suit, too many liabilities and too little income.

Is this going to be the next domino or will the Federal govt step in to bailout bond holders?

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I can't see how the Government could, or dare bail out the bond holders? surely if that happened all the cities/states would just default knowing the Government will pay off the holders of the debts? This could be big time stuff next week?

They've been happily bailing out Wall Street, it would appear for many years before the crash even happened.

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Orr said secured creditors would get better treatment, although how much better was not specified.

"We may try to get a discount from them, but the reality is they are secured," Orr said. Secured credit means an asset is pledged to back the debt, for example Detroit has secured its interest rate swap agreements with casino revenue.

He said the city would skip a $34 million payment due on Friday on $1.43 billion of pension certificates of participation, to allow the city to conserve cash needed to provide services to residents.

Fitch Ratings said this amounted to a default which would result in a downgrade of the credit rating on that debt.

Why would secure creditors agree to anything less?

So if this is a default it's going to cause panic in the derivatives market as that's "insurance" that no one is ever expected to pay out on?

Hilarious.

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It will be interesting to see how Washington reacts to this. Detroit is bankrupt and many other US cities will have to follow suit, too many liabilities and too little income.

Is this going to be the next domino or will the Federal govt step in to bailout bond holders?

I am interested in that too. Obviously Detroit is going early because it is in worse shape than most. But most cities have enormous pension and other benefit promises they have made to the older generations. Once that huge wave of boomer government workers retires, it is hard to imagine how they will make all the pension payments and also govern. The younger generation working part time at Starbucks simply cannot pay these liabilities.

Another question is who are the bondholders. For example are the bondholders banks.. or pension funds? You can see how If some municipalities start defaulting because of pension costs, it could cause cascading defaults.

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Another question is who are the bondholders. For example are the bondholders banks.. or pension funds? You can see how If some municipalities start defaulting because of pension costs, it could cause cascading defaults.

Cascading defaults.. AaggaGGhGhghGhGhghhhh.

Some of its insured. Main creditors like banks should have priced-in for some restructuring when offering the loans in the first place, given the declining outlook of Detroit for decades maybe, from its hey-day. Some of the debt is probably owned by high-yielding speculator funds, and I sure don't care if their debt is unsecured and they are forced to accept 90% default.

Labor leaders said they had much to discuss with Mr. Orr next week, though some were not sure they would ever feel comfortable with the plan, arguing that retirees have worked hard for their pensions and should not be treated the same as creditors.

NYT http://www.nytimes.c...l-problems.html

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It will be interesting to see how Washington reacts to this. Detroit is bankrupt and many other US cities will have to follow suit, too many liabilities and too little income.

Is this going to be the next domino or will the Federal govt step in to bailout bond holders?

Depends. If there are big democrat donors like the UAW involved, as with GM, i think we know the answer.

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As I understand it, there is no mechanism for a city or state to default or go bankrupt.

They can say they will only pay 10c on the dollar, but if the creditors go to court a judge will simply order the city to pay.

Perhaps they are starting at 10c with a plan to negotiate and try and get it down from 100c to 50c.

In bankruptcy, the remaining assets are sold and the cash used to pay investors. Most cities have massive assets. Detroit seems to own water and power, which have huge value.

We haven't heard the end of this. I predict some sort of bailout, one way or another.

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As I understand it, there is no mechanism for a city or state to default or go bankrupt.

They can say they will only pay 10c on the dollar, but if the creditors go to court a judge will simply order the city to pay.

Perhaps they are starting at 10c with a plan to negotiate and try and get it down from 100c to 50c.

In bankruptcy, the remaining assets are sold and the cash used to pay investors. Most cities have massive assets. Detroit seems to own water and power, which have huge value.

We haven't heard the end of this. I predict some sort of bailout, one way or another.

From 1970 to 2007, there was an average of 1.3 municipal bond defaults per year. Since the financial crisis, this has increased to 4.6 per year.

Certain muni bonds are secured on assets, but the bulk are not and as I understand it, there is no power to seize municipal assets on default.

I do not expect there to be a bail-out of investors - this is not the approach taken previously and it would undermine the US financial system. Muni's pay higher yields because they are higher risk than US Treasuries.

Pension funds and insurers would be the likely big holders of muni's. The yield is better than US Treasuries and the default risk is lower than corporate bonds. These funds will have diversified so should only have a limited exposure to a single issuer.

This will also not bring about the CDS apocalypse so longed for on HPC.

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My cousiin is marrying a Detroit girl. He is a school teacher and hasn't got a hope in hell of getting a job over there with a bankrupt public sector. She aint moving here, having experienced inner city life at one of our Universities.

Her parents are public sector workers who live in an apparently millionaire enclave on the outskirts. The city is indeed a hollow ghetto in the centre, with an extremely well off population in the suburbs of professional public sector types etc. A profligate public sector was once supportable by a (now bombed out) private sector.

Edited by crashmonitor

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Why would secure creditors agree to anything less?

It depends on what they're secured against. It could easily be, for example, that the bonds are secured against municipal property which is worth way less than it was when the bonds were issued.

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As I understand it, there is no mechanism for a city or state to default or go bankrupt.

They can say they will only pay 10c on the dollar, but if the creditors go to court a judge will simply order the city to pay.

Of course a city can go bankrupt - whole countries can, like France in the 18th century or Argentina in 2001. In the US, the city can go for Chapter 9 bankruptcy - read this: http://www.freep.com/article/20130616/NEWS01/306160056/Detroit-Chapter-9-bankruptcy-FAQ?odyssey=obinsite

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Of course a city can go bankrupt - whole countries can, like France in the 18th century or Argentina in 2001. In the US, the city can go for Chapter 9 bankruptcy - read this: http://www.freep.com/article/20130616/NEWS01/306160056/Detroit-Chapter-9-bankruptcy-FAQ?odyssey=obinsite

Yes and no. I imagine the problem would be convincing a judge that they cannot pay. Which would be almost impossible.

The city would say it cannot pay, the creditors would say the city could raise taxes or sell assets in order to pay.

Bankruptcy is where your liabilities are higher than you assets. A cities assets include it's right to tax. You would essentially have to convince the judge to ignore the law.

So I suppose it depends on how corrupt your judge is.

If a judge agreed to write-down pensions, unless the judge himself was seeing his pension slashed, the decision would be overturned on appeal anyway.

Basically, it's a huge barrel of worms that no-one wants to open, and I fully expect some sort of sly bailout on the quiet to avoid it.

I suspect the bond insurers will pay out and the government will quietly bail-out the bond insurers.

It's catch 22 though.

Ultimately if Detroit went bankrupt without massive, awful, painful, consequences, it would risk the collapse of the US... half the states in the US would walk away from their debts within a year... I mean, why would they pay them if not paying them had no consequences?

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I remember reading in depth about the Stockton, California bankruptcy. The judge said that cities have a certain legal duty to provide services, and that they could not just raise property taxes anymore. If there was anything left over then the creditors would get that.

There will be a legal step by step process for determining how much must be spent on services, how high property taxes are allowed to go, and the order that creditors get paid if anything is left over. I believe the legal precedence dates back to cases in 16th century England.

The legal duty to provide services over-riding creditor claims is similar to personal bankruptcy. The judge uses a formula to determine cost of living, and there is a maximum percentage of income that is allowed to be spent on debt servicing. A guy I know went bankrupt and was paying about 70% of the family income on the mortgage(his wife lost her job). The judge reduced his mortgage from ~550k to ~210k, based on the formula of 30% of his income on debt servicing. He also had accumulated 10's of thousands in credit card debt to make bills over the past several years. The judge wrote those off, as they were unsecured debt, and subordinate to the mortgage debt. In some personal bankruptcy cases if the person's income is below the minimum cost of living, the judge writes off 100% of all debts.

Few people who are investing in these types of securities like municipal bonds(including pension fund managers), really understand the law. However a few hits on their portfolio and they will rapidly figure it out.

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Yes and no. I imagine the problem would be convincing a judge that they cannot pay. Which would be almost impossible.

The city would say it cannot pay, the creditors would say the city could raise taxes or sell assets in order to pay.

Bankruptcy is where your liabilities are higher than you assets. A cities assets include it's right to tax. You would essentially have to convince the judge to ignore the law.

So I suppose it depends on how corrupt your judge is.

If a judge agreed to write-down pensions, unless the judge himself was seeing his pension slashed, the decision would be overturned on appeal anyway.

Basically, it's a huge barrel of worms that no-one wants to open, and I fully expect some sort of sly bailout on the quiet to avoid it.

I suspect the bond insurers will pay out and the government will quietly bail-out the bond insurers.

It's catch 22 though.

Ultimately if Detroit went bankrupt without massive, awful, painful, consequences, it would risk the collapse of the US... half the states in the US would walk away from their debts within a year... I mean, why would they pay them if not paying them had no consequences?

So what happened in all the other municipal defaults then? You appear quite knowledgeable, but I do not remember any of them bringing down the US financial system.

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  • 242 Brexit, House prices and Summer 2020

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