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Home » Collapse » Elliott’s Singer Sees More Detroit-Style Municipal Insolvencies | Zero Hedge

Elliott’s Singer Sees More Detroit-Style Municipal Insolvencies | Zero Hedge

Elliott’s Singer Sees More Detroit-Style Municipal Insolvencies | Zero Hedge. (source)

Via Paul Singer of Elliott Management,

In the U.S., states cannot file for bankruptcy. Cities can, however, and there is a special provision in federal bankruptcy law reserved for cities. Furthermore, unlike countries, states and cities cannot print their own currency. When they overspend or overpromise, they beg for money from the federal government (or state government, in the case of cities), reduce their spending and/or default on their obligations. When the cash register is empty, it is lights out – literally. By contrast, the ability to print money allows countries to get away with long-term insolvency (at least until markets wake up and force them to restructure their obligations).

What is happening in Detroit – a combination of poor and corrupt civic leadership, shortsighted business leaders and overreaching labor unions – is interesting because it was 40 years in the making, but just months in the denouement. It turns out that Chapter 9 of the Bankruptcy Code gives judges tremendous leeway to chop obligations quickly and severely, regardless of the expectations of pension-holders and bondholders.

We see Detroit as the “coming attraction” to a significant number of municipal insolvencies in the months and years to come. Perhaps the pain of the restructurings will improve the behavior of city governments, labor groups and businesses, and perhaps it won’t.

But there is no question that this episode is a precursor to what will happen on the federal level as national promises prove to be empty.

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