Tuesday, March 9, 2010

What Happens When American Cities File For Bankruptcy; Illinois is Insolvent

Harrisburg, PA is teetering on insolvency and is about to file for Chapter 9. BNN interviewed Scott Y. Stuart, executive director, Donlin Recano & Company Inc.

Some of his points:
  • Municipal bonds were considered safe for a long time, not anymore

  • About 600 chapter 9 cases have been filed since the code's ceration

  • Orange Country was chapter 9 as well

  • On the difference between Chapter 9 and chapter 11: Chapter 9 needs state approval, many states don't allow it. involves the court system at a different level, judge serves a more limited role, usually used to break unions contracts or to get bond holders to get debt reductions, they are very drastic measures, political suicide, tax payers will bear a burden. In many cases it is simply a gateway to litigation.

  • Municipalities have desperate budget gaps

  • He also discusses the states: California; Illinois by all definitions is bankrupt insolvent. Will the states raise taxes?

  • These problems are as significant as Greece or Portugal

  • Chapter 9 is used in smaller municipalities, too expensive to take on the unions

  • Insolvency is incredibly expensive

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Deming said...

Yes, tough times in the U.S. for states and municipalities.

That said, I don't believe there has been an actual total default on a muni bond since the depression era of the 1930's. Even Orange County, which filed Chapter 9 as alluded to in the interview, eventually paid off all debt although it was delayed and past the original maturity dates.

That said, governments are stretched more than at any other time since the depression. There will be pain, layoffs, reductions in service, increased taxes, fees and some Chapter 9 filings by small municipalities.

Will there right out defaults on some muni bonds? It remains to be seen. Keep in mind a number of muni bonds are insured. I suspect the market had priced this in, however with the recent market move up, perhaps some have forgotten this exposure risk.


Deming said...

Just to clarify:

I suspect the market had priced this in for insurers, however with the recent market move up, perhaps some have forgotten this exposure risk to these companies.


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