This doesn't seem to be getting as much press as it might have had it happened back in 2008/9, or maybe no one is very surprised, but the city of Detroit is filing for bankruptcy. All those news stories you read about city and state Governments having more obligations than they could meet, huge pensions, etc. seem to have concluded in Michigan, with Motor City wiping the slate clean.
This did not seem to make the news, and I cannot guess that the impact will be. First, I don't think that it will start any sort of domino chain as predicted by Meredith Whitney. Detroit may be the first, but it will also likely be the last (at least until the next crises).
Second, I'm curious as to which liability holders will be made whole and who will take a haircut. Detroit owes about $20B, of which half are retirement liabilities (pensions, health-care, life insurance) and the rest are to bond holders. How the pie gets split will reveal how power actually rest between the players.
Third, the state of Michigan could sweep down and take on the obligations themselves, turning this from a City level issue to a State level issue and then daring the US Govt not to Federalize it. The Federal Govt could, of course, write a check whenever they pleased so this is ultimately a political calculation. Again, interesting to see how power actually rests between the players. I do not know what the dynamics are between Detroit and Lansing, or between Lansing and DC, but I guess we will find out.
Finally, I don't think that a haircut in Detroit Munis will impact the municipal bond market more generally. There seems to be no contagion concern around this. I don't know who holds Detroit Munis, and to what degree a write down amongst those players will force them to sell the rest of their portfolio, and generate at LTCM style melt-down, but no one seems worried.
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