Tuesday, July 23, 2013

Meredith Whitney: 'Detroit Will Start A Wave of Municipal Bankruptcies'

Whitney writes in FT:

As jarring as the reality may be to accept, Detroit’s decision last week to declare bankruptcy should not be regarded as a one-off in the US municipal market – which is what the bond-peddlers are now telling their clients. The aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents.

Municipal bankruptcies have historically been rare for a number of reasons – including the states’ determination to preserve their credit ratings, their access to cheap funding and the stigma of bankruptcy. But, these days, things are very different in the world of municipal finance.

At the root of the problem is the incentive system that elected officials used to face. For decades, across the US, local leaders ran up tabs for future taxpayers; they promised pensions and other benefits for public employees that have strong legal protection. That has been a great source of patronage for elected officials: they can promise all sorts of future perks to loyal supporters (state and local workers) with very little accountability on the delivery of those promises.[...]

leaders across the country cannot continue as they have. They must choose sides because there is simply not enough money to go around. Will they side with taxpayers, unions or the municipal bondholders? If they back residents, money will be directed to underfunded public services at the expense of pensions and bondholders. If they side with the unions, social services will continue to be cut and the risk to bondholders will increase considerably. If they side with bondholders, social services and pensions are at risk.[...]

There are five more towns like Detroit in Michigan alone. There are many more municipalities across the country in similar positions.


  1. If they don't side with taxpayers, the source of their revenues wanders away, leaving them only with debt and no way to pay it off.

  2. They want side with bond holders until everyone is broke... Its the unions political pull and the have notes that will take from those who work hard and was prudent savers that will pay the bills all with our grand kids. Used to be a geat country if you worked hard you were rewarded with the fruit of your labor. This is not the case anymore as the mentality from the President and his adm is to take from the haves and give it to the have nots. Recreating the great welfare state that rewards you for doing nothing and still get you a monthly check. The country I knew sadly is no more...