Good Idea, Chap: Municipal Bankruptcy; the Rise and Fall of Detroit

Link to podcast:

<< http://www.mixcloud.com/antonipeychev/good-idea-chap-municipal-bankruptcy-the-rise-and-fall-of-detroit/ >>

Let me begin by saying that I am no insolvency expert and am merely writing this article as a bewildered and shocked observer.

As most of you, I’m sure, are aware, during the last couple of years, a good deal of high street brands have gone bust in the UK including big names such as Comet, Blockbuster, HMV, Game, etc.

Some economists blame the companies for causing their own demise by maintaining an unhealthily high degree of leverage (high debt- to- equity gearing ratios, i.e. more debt than equity capital/ shares).

Others, on the other hand, have pointed out that UK’s state of stagnation (the ‘I’m-not giving-my-money-to-ANYONE’ attitude) and the significant decrease in consumer spending might have triggered the chaotic chain of failures.

Whatever the case might be, the failings of those high street brands have heavily affected the UK retail sector.

It has not only made consumers wearier to spend but also more picky and choosy about what they spend on.

As a result, the media coverage on the above has been phenomenal; judging by the sheer amount of articles and reports on the matter, one might well be justified in concluding that the said failures have truly shocked the everyday reader.

Whether that is because the said reader enjoys seeing big names collapse or is worried about his own country’s retail sector and economic financial well- being is a completely different story.

Leaving any speculations aside, it is a fact that the consecutive failings of high street brands has come as a surprise to the general public as all of the above chains have always been considered as ‘too big to fail’ (as were banks, remember…? But let’s NOT go there…).

Alas, it is quite true that the bigger they are, the harder they fall.

Furthermore, if the failings of a dozen of retail chains causes so much kafuffle (love that word), just imagine how much commotion will a city filing for municipal bankruptcy cause!

Unfortunately, you won’t need too much imagination to do that as it is currently happening to the, once glorious, city of Detroit, Michigan.

See <<<  http://www.thefiscaltimes.com/Articles/2013/03/01/Is-Detroit-Going-Bankrupt-State-Takeover-Possible.aspx >>

At this point, both you and I are hoping that the above is a distasteful joke of sorts; well, it pains me to say that it is not.

Since 2010, the population of Detroit has decreased by some 25%, leaving it with a total of 700, 000 people; it has gone down from the 5^th to 18^th biggest city in the USA.

The unemployment rate has risen to 18% and the crime rate has almost quadrupled.

In January, a financial plan, which was supposed to resurrect the city, was put into place; it didn’t work.

Now, the city has filed for a Chapter 9 municipal bankruptcy and is waiting to go into ‘administration’.

See << http://www.nationalbankruptcyforum.com/state-specific-bankruptcy-issues/what-is-municipal-bankruptcy/ >>

Put simply, a ‘manager’ (an administrator…) will be put in charge of dealing with all financial matters- spending, dealing with creditors, etc. Although the manager’s powers are limited under the current Michigan law, a new law coming into force on 28^th March 2013 will allow the manager to deal with the city’s affairs more freely by introducing new powers and extending existing ones.

The story initially struck me as being quite unbelievable; however, upon doing some background reading, I found out that during the Great Depression, quite a few cities and towns in the US have gone through municipal bankruptcy (none as big as Detroit, though).

The above then begs several questions which are worth pondering on, namely:

• How has the US let a city as big and as important as Detroit go bust and who’s next?
• Will Detroit’s filing for municipal bankruptcy have any draconian international implications or will it go unnoticed?
• Considering that the UK did not do much to save its retail sector (as it was private), how much would the Government be willing to do to save a city, if need be and, if so, how?
• Taking into account the fact that cities can, apparently, go bust, do you still think that your local high street shop closing down is that big of a deal?

Make yourself a cup of hot cocoa and have a think; I dare you.