19/7/2013: Detroit officially files for Chapter 9

So after much of prevarication and discussions with the unions (there always discussions with the unions involved), the City of Detroit has filed for Chapter 9 federal bankruptcy protection. Detroit recently missed USD40 million payment to its own pension system and has amassed estimated USD18.5-20 billion in long-term liabilities.

Washington Post has an excellent timeline on the crisis: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/18/detroit-just-filed-for-bankruptcy-heres-how-it-got-there/

The city has shrunk over the decades from over 1.8 million in 1950 Census to around 700,000 currently (2010 Census put Detroit population at 713,777). In 2000-2010 the city population fell by 25% with the city rankings in the US by population falling from 10th largest to 18th largest. Meanwhile the six-counties Metropolitan Detroit area population is healthy at 4.296 million and ranks 13th largest in the US.

Quote from the Washington Post: "The official unemployment is now 18.6 percent, and fewer than half of the city’s residents over the age of 16 are working. Per capita income is an extremely low $15,261 a year…"

And another quote: "“The city’s operations have become dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption,” Orr wrote in May. “Outdated policies, work practices, procedures and systems must be improved consistent with best practices of 21st-century government.” (Detroit has been a one-party city run by Democrats since 1962.)"

A good compendium of information on Chapter 9 bankruptcy for the cities from the Business Inside here: http://www.businessinsider.com/municipal-bankruptcies-explained-2013-7

Apocalyptic imagery of the city: http://www.marchandmeffre.com/detroit/

And my earlier post on the lessons Detroit bankruptcy process offers in comparatives to Ireland's errors in relation to the banks crisis:
http://trueeconomics.blogspot.ie/2013/06/662013-detroit-is-about-to-go-bankrupt.html
As usual, this blog was ahead of the Irish news curve by a month...

Lastly, a ray of hope: http://www.businessinsider.com/after-filing-bankruptcy-detroit-is-on-the-verge-of-an-epic-comeback-2013-7

Which echoes some of my tweets on the subject (read from the bottom tweet up):

14/6/2013: Detroit suspends payments on unsecured debt

I recently wrote (albeit in distinct context) about Detroit's bankruptcy. Here's the latest on the saga:
http://www.bloomberg.com/news/2013-06-14/detroit-on-bankruptcy-s-brink-stops-paying-some-debts-orr-says.html

I love this city because it gave me (via Chicago) my greatest partner in the crime of life. And my students in Smurfit Graduate School of Business are certainly familiar with the imagery of the urban collapse from Detroit and Flint, Michigan on foot of my lecture notes slides penchant for dramatic photography.

Sadly, it is totally, comprehensively, irreparably destroyed. Its only hope is a structured and comprehensive default followed by a bottom-up restructuring of its economy, demographics, politics, policies and institutions. Let's hope Michigan State will not commit the errors committed by the Euro area 'leaders' in Greece, Ireland, Portugal, Cyprus, Spain, Italy...

6/6/2013: Detroit is about to go bankrupt... differently from the Irish banks

So who is to say sovereign (or rather quasi-sovereign) defaults are a rarity in fiscal + currency unions? Here's a story about forthcoming, well-flagged in advanced Chapter 9 bankruptcy for Detroit: http://www.theepochtimes.com/n3/93438-detroit-facing-chapter-9-bankruptcy/

And, guess what - the story is telling in more than just one context. The terms and conditions of the restructuring will be ugly, but manageable... And the sequencing of events is revealing:

• Step 1: Detroit had $15.7 billion debt load it cannot repay - diagnosis was set as insolvency. 
• Step 2: The city was taken over by the state of Michigan and emergency manager was appointed.
• Step 3: The state of Michigan needed a calm evaluation of the problem confirming the diagnosis of insolvency and it was deemed to be structural (economy suffering from unsustainable levels of unemployment, declining population, loss of revenues, etc, but also cost overruns).
• Step 4: Rating agencies dropped ratings on Detroit debt and debt limits kicked in before then.
• Step 5: Chapter 9 bankruptcy, forced deal with the unions and Financial Advisory Board was set up with very clear termination objectives.

The sequencing of events above is distinct from what has happened in the case of Ireland's banking crisis resolution, where the above steps were re-ordered as follows:

1. Steps 4 and 5 (resolution steps) took place ahead of any assessment and diagnosis postulation and confirmation (banks guarantee issuance)
2. Step 3 took place next in the form of PCARs assessments
3. Step 2 (takeover) took place only after the PCARs
4. Diagnosis was never fully correctly established - all banks, save for Anglo and INBS are still considered officially solvent
5. Step 5 never took place with exception of Anglo and INBS

In other words, we never created a security cordon around the banks that would have resulted in banks takeover prior to guarantees and recapitalisations and this has meant that the banks were always able to use the threat of disclosure of insolvency as the means for bargaining out improved position vis a vis the taxpayers. 

Best proof of this: at no point in time did the state of Michigan tell the markets or the nation or its own taxpayers that Detroit will never be allowed to go bust. In contrast, during 2008-2010 period, Irish Government repeatedly asserted that the banks will be provided all and any funding necessary to stay in business.