K-12 Tax & Spending Climate: Detroit bond decision risks raising costs of other states

Stephen Foley and Vivianne Rodrigues

Local governments across the US face potential reviews of their credit ratings and higher funding costs if a financial restructuring proposal for Detroit is endorsed by a bankruptcy judge.

Rating agencies and institutional investors in municipal bonds say they will reconsider their views on so-called "general obligation" (GO) bonds, if Detroit is allowed to treat the owners of these securities as unsecured creditors.

The largest city bankruptcy in US history is being watched closely by people across the $3.7tn municipal bond market, for fear it could upturn long-held assumptions about the relative safety of GO bonds.

Fitch, the credit rating agency, warned it could re-evaluate its approach to GO bonds, depending on the outcome of Detroit's restructuring, and Moody's and Standard & Poor's both said they were monitoring the case closely.

Posted by Jim Zellmer at July 26, 2013 12:28 AM
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