Municipal Bankruptcy and Default

Detroit’s repudiation of its COPs in bankruptcy is not supported by the history of government finance in the U.S. Repudiation of debt by states or local governments is not new, dating back as far as the early 1800’s. The lessons learned from that repudiation should not be forgotten.

Muni investors were sitting on pins and needles Tuesday morning and it was not all about the outcome of the USA-Belgium World Cup match. Weighing on their minds was the question of whether or not, in the wake of last week’s events, PREPA would be making payment for the July 1st coupon on its debt. A non-payment, of course, would constitute the largest muni default to date, eclipsing the Detroit case. It would also send a clear message that PREPA intends to seek imminent relief under the new “bankruptcy law” for public corporations.