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$2 trillion debt crisis threatens to bring down 100 US cities

Overdrawn American cities could face financial collapse in 2011, defaulting on hundreds of billions of dollars of borrowings and derailing the US economic recovery. Nor are European cities safe - Florence, Barcelona, Madrid, Venice: all are in trouble
Parent article location:  http://www.guardian.co.uk/business/2010/dec/20/debt-crisis-threatens-us-cities

More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.

Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery.

"Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy," Whitney told the CBS 60 Minutes programme on Sunday night.

"There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults - more. This will amount to hundreds of billions of dollars' worth of defaults."

New Jersey governor Chris Christie summarised the problem succinctly: "We spent too much on everything. We spent money we didn't have. We borrowed money just crazily. The credit card's maxed out, and it's over. We now have to get to the business of climbing out of the hole. We've been digging it for a decade or more. We've got to climb now, and a climb is harder."

American cities and states have debts in total of as much as $2tn. In Europe, local and regional government borrowing is expected to reach a historical peak of nearly 1.3tn (1.1tn) this year.

Cities from Detroit to Madrid are struggling to pay creditors, including providers of basic services such as street cleaning. Last week, Moody's ratings agency warned about a possible downgrade for the cities of Florence and Barcelona and cut the rating of the Basque country in northern Spain. Lisbon was downgraded by rival agency Standard & Poor's earlier this year, while the borrowings of Naples and Budapest are on the brink of junk status. Istanbul's debt has already been downgraded to junk.

Whitney's intervention is likely to raise the profile of the issue of municipal debt. While she was an analyst at Oppenheimer, the New York investment bank, in October 2007 she wrote a damning report on Citigroup, then the world's largest bank, predicting it would cut its dividend. She was criticised for being too pessimistic but was vindicated when the bank was forced to seek government support a year later. She has since set up her own advisory firm and is rated one of the most influential women in American business.

US states have spent nearly half a trillion dollars more than they have collected in taxes, and face a $1tn hole in their pension funds, said the CBS programme, apocalyptically titled The Day of Reckoning.

Detroit is cutting police, lighting, road repairs and cleaning services affecting as much as 20% of the population. The city, which has been on the skids for almost two decades with the decline of the US auto industry, does not generate enough wealth to maintain services for its 900,000 inhabitants.

The nearby state of Illinois has spent twice as much money as it has collected and is about six months behind on creditor payments. The University of Illinois alone is owed $400m, the CBS programme said. The state has a 21% chances of default, more than any other, according to CMA Datavision, a derivatives information provider.

California has raised state university tuition fees by 32%. Arizona has sold its state capitol and supreme court buildings to investors, and leases them back.

Potential defaults could also hit Florida, whose booming real estate industry burst two years ago, said Guy J. Benstead, a partner at Cedar Ridge Partners in San Francisco. "We are not out of the woods by any stretch yet," he said.

"It's all part of the same parcel: public sector indebtedness needs to be cut, it needs a lot of austerity, and it hit the central governments first, and now is hitting local bodies," said Philip Brown, managing director at Citigroup in London.

In Europe, where cities have traditionally relied more on bank loans and state transfers than bonds, financing habits are changing. The Spanish regions of Catalonia and Valencia have issued debt to their own citizens after financial markets shut their doors because of the regions' high deficits. Moody's cut to the rating of the Basque country on Friday left it still within investment grade but noted "the rapid deterioration in the region's budgetary performance in recent years". It said it expected it to continue over the medium term.

In Italy, Moody's and S&P have threatened to downgrade Florence, while Venice has been forced over the past few months to put some of the palazzi on its canals up for sale to fund the deficit.

"Cities are on their own. Governments won't come to their rescue as they have problems of their own," said Andres Rodriguez-Pose, professor of economic geography at the London School of Economics. "Cities will have to pay for their debts, and in some cases they will have to carry out dramatic cuts, such as Detroit's."

California crunch

Vallejo, a former US navy town near San Francisco, is still trying to emerge from the Chapter Nine bankruptcy protection it entered in 2008.

The city, now a symbol of distressed local finances, is still negotiating with the unions, which refused to accept a salary cut plan two years ago. Paul Dyson, an analyst with the Standard & Poor's credit agency, said Vallejo, which is mostly a dormitory town for Oakland or San Francisco employees, did not have enough local industry to sustain its finances and property tax - a major source of local income - plunged with the collapse of the real estate market. The S&P credit-rating agency has a C rating on the town - the lowest level.

With a population of about 120,000, Vallejo has $195m (125m) of unfunded pension obligations and has to present a bankruptcy-exit plan to a Sacramento court by 18 January. Since 1937, 619 local US government bodies, mostly small utilities or districts, have filed for bankruptcy, Bloomberg News recently reported. US cities tend to default more than European municipalities as they usually rely on bonds issued to investors, which enter into a default if the creditor misses payments. European towns, by contrast, traditionally depend on bank loans and government bailouts.

Detroit mayor shrinking city by cutting essential services 20.Dec.2010 13:11

Guardian UK

This article describes how the Mayor of Detroit is cutting services like police "protection" to some areas to socially engineer its way out of the crisis. People in the area are suggesting and using urban farming as a way to sustain the population in the area. Some houses are going as low as $100 but before you move Detroit used to be called "murder city" instead of "Motor City." Maybe the best you can do is watch your back and brave it out, speaking from experience from living in poor rust belt cities.


"Fifty years ago, Detroit was home to almost 2 million people. Today, many of the once bustling, car clogged streets of the motor city are largely abandoned. The population is less than half what it was. One in five houses is empty, and the crisis has only deepened with the mass foreclosures of recent years.

Now the city authorities, faced with talk of bankruptcy, plan to downsize Detroit by cutting off services, such as policing and sewerage, to large parts of the blighted metropolis in an effort to pressure residents to move to core neighbourhoods of a smaller city.

In some parts of Detroit, 80% of housing is empty amid widespread unemployment. Many have simply abandoned properties now worth a fraction of the mortgages on them.

Property prices have collapsed to the point where houses can be had for $100, although the average price is $7,500 (5,000). The city council gives homes away to those prepared to pay the outstanding property taxes.

The mayor of Detroit, Dave Bing, said that his administration cannot afford to go on providing services such as schools, firefighters, buses and rubbish collection to large areas of the city where the population has dropped sharply and fewer people paying property taxes has left a $300m hole in the budget.

Bing told the Detroit Free Press that no one will be forced to move but those who remain outside of designated parts of the city "need to understand that they're not going to get the kind of services they require".

"They are much better off moving into a more dense area so that we can provide them with the services they need: that would be water, sewer, lighting, public safety - all of that," Bing said. "We think that getting our city to be more dense with its population is the right route."

Bing said that next year he will launch a plan to encourage people to concentrate themselves in about nine neighbourhoods that account for two-thirds of Detroit. Houses in the remaining one third, about 45 square miles, are eventually likely to be bulldozed to make way for new projects such as urban farms.

The city administration is expected to announce which neighbourhoods are to form the core of a revived Detroit in the spring but they will include those areas of the city which are still relatively well populated but losing residents.

"We want to make sure that, before those neighbourhoods deteriorate much more, we give them support," Bing said.

The move was welcomed by John George, who heads a group, Blight Busters, which has revitalised communities by rehabilitating abandoned houses for the very poor.

"I think it's a brilliant idea. Detroit needs to be leaner and greener and we need to right size the city to match the population as well as the budget," he said.

George said that although residents of large parts of Detroit will be pressured to move by the reduction in services, they should see it as an opportunity.

"There's an opportunity here now the housing bubble has burst. In the city of Detroit in just about any solid neighbourhood, you can buy a two, three-bedroom brick house for $15,000. There's really an opportunity to move out of shacks, substandard housing, and to move in to more of a substantial home," he said.

"I think that people who do their homework and don't let fear engulf them should look at this as an opportunity to move from a decrepit, blighted community in to one that is healthy, clean, safe, affordable."

Still under debate is what to do with the areas of Detroit that the mayor would like to empty out. One plan under discussion is to bulldoze the housing and establish a 2,000-acre farm in one neighbourhood.

George said that urban farms could transform Detroit.

"We should dismantle, deconstruct those areas and turn them over to urban farms where we are tilling a thousand or fifteen hundred acres and we are growing fresh fruit, fresh vegetables and creating jobs in canning and shipping and packaging. We could have half a dozen of those farms spread out across the city because the city unfortunately lacks quality supermarkets. It's really a fresh fruit desert in many ways.

"There's no reason why this land when it is cleared cannot be ploughed and be an asset to the community."