Meredith Whitney: Detroit Bankruptcy May Upend Muni Market

Wednesday, 24 Jul 2013 12:09 PM

By Michael Kling

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Detroit may start a wave of municipal bankruptcies that could threaten the entire municipal bond market, warns star analyst Meredith Whitney.

"There are five more towns like Detroit in Michigan alone. There are many more municipalities across the country in similar positions," Whitney writes in an op-ed for the Financial Times.

"The aftershocks of the largest municipal bankruptcy in U.S. history will be staggering, and Detroit will set important precedents."

Editor's Note:
'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

Like Detroit, many other cities face huge liabilities in the pension funds and other benefits it has promised employees.

"The bill for promises past," writes Whitney, head of Meredith Whitney Advisory Group LLC, "is now so large for some cities and towns that it is crowding out money for the most basic of services — in the case of Detroit, it could not even afford to run its traffic lights."

The question for strapped cities, she says, is if government leaders side with their city's residents, public workers or bondholders. If they support the residents, they can finance basic public services. If they side with the unions, they'll have to cut services even more. If they side with bondholders, both services and pensions could be cut.

In Detroit, city leaders sided with residents. That could be a precedent for other municipalities, Whitney predicts.

"Detroit’s decision last week paves the way for other elected or non-elected officials to make decisions to save their cities and towns, decisions that probably involve politically unpopular actions that may secure their long-term viability," she explains.

"After decades of near-third-world conditions in the richest country in the world, the city finally stood up and said enough was enough."

Whitney has been predicting a spike in municipal bankruptcies for years, but the tsunami has yet to materialize.

She has been ridiculed as an alarmist, says senior analyst Michael Hewson of CMC Markets in London, according to The Globe and Mail.

"However, ... her concerns look like being very prophetic," Hewson says. "It's probably no surprise that all those analysts who criticized her then have gone awfully quite given last week’s news over the city of Detroit’s finances, and its decision to file for Chapter 9 bankruptcy."

Muni bond problems in the United States, Hewson warns, could spill over to Europe and impinge banks' lending abilities, and increase chances that banks will need help from the European Central Bank.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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