Detroit Recovery Plan Threatens Muni-Market Underpinnings
Emergency Manager Kevyn Orrâ€™s plan to suspend payments on $2 billion of Detroitâ€™s debt threatens a basic tenet of the $3.7 trillion municipal market: that states and cities will raise taxes as high as needed to avoid default.
By calling into question the safety of any security backed by a governmentâ€™s general obligation to pay what it owes, Orr, 55, imperils similar debt across Michigan, the eighth-most-populous state. As local governments strive to rebound from the longest recession since the 1930s, they may confront higher borrowing costs.
â€śIt definitely sets a precedent, and thereâ€™s definitely going to be a penalty going forward for the city and the state,â€ť said Dan Solender, director of munis at Lord Abbett & Co. in Jersey City, New Jersey. The company oversees $19.5 billion of local debt....