Detroit files for bankruptcy

Detroit files for bankruptcy Steven Church, Dawn McCarty and Margaret Cronin Fisk (Bloomberg) / 20 July 2013 Detroit, the cradle of the automobile assembly line and a symbol of industrial might, filed the biggest US municipal bankruptcy after decades of decline left it too poor to pay billions of dollars owed bondholders, retired cops and current city workers. “I know many will see this as a low point in the city’s history,” Michigan Governor Rick Snyder, a Republican, said in a letter on Thursday authorising the filing in US Bankruptcy Court in Detroit. “Without this decision, the city’s condition would only worsen.” Michigan’s largest city joins Jefferson County, Alabama, and the California cities of San Bernardino and Stockton in bankruptcy. The filing shattered the presumption of many bondholders that local governments, eager to continue borrowing at reasonable rates, would do whatever it took, including raise taxes, to come up with the money to meet bond obligations. Kevyn Orr, the city’s emergency manager, said the debt is $18 billion. While under court protection, Detroit can stop paying some debts, is temporarily immune from most lawsuits and may be able to ask a judge to cancel contracts, including union agreements. Under Chapter 9 of the US Bankruptcy Code, the first step is likely to be a court fight over whether the city was entitled to bankruptcy protection, a challenge that would ask if the city was truly insolvent and it had no alternative to filing. Detroit’s filing “is going to affect a number of local governments around the country,” said Keith W. Mason, a bankruptcy attorney with McKenna Long & Aldridge. “It calls for greater early intervention.” In trading on Thursday, investors demanded higher yields to buy Detroit debt rather than top-rated municipals. Unlimited general-obligation bonds maturing April 2028 traded with an average yield of 5.73 per cent, about 2.3 percentage points more than benchmark munis, data compiled by Bloomberg show. That’s the biggest yield gap since June 24. The bonds are insured by Assured Guaranty Ltd. The city that gave the world the Model T and fuelled the American love affair with tailfins, chrome fenders and big-block V-8 engines began a long decline in the middle of the last century as US carmakers began moving production out of town, and many residents followed. The stomping grounds of Harley Earl, who helped make the Chevrolet Corvette, and Marvin Gaye, a mainstay of Motown music, emptied as the suburbs swelled. Now the city is plagued by barren lots and empty buildings. Its population, which peaked at 1.85 million in 1950, has declined to about 700,000, according to US Census data. Manufacturing jobs fell from about 296,000 in 1950 to fewer than 27,000 in 2011. About 60,000 properties in the city, or 15 per cent of all parcels, were barren and at least 78,000 buildings were vacant, including 38,000 deemed potentially dangerous, Orr said in a report this year. Median household income was less than $28,000, compared with $49,000 statewide, and more than 36 per cent of residents lived in poverty, 2011 Census data show. Taylor Scott International