Detroit finally files

This bankruptcy filing isn’t exactly a surprise, but it does mark a potentially significant step in the deflationary process:

The city of Detroit filed the largest
municipal bankruptcy case in U.S. history Thursday afternoon,
culminating a decades-long slide that transformed the nation’s iconic
industrial town into a model of urban decline crippled by population
loss, a dwindling tax base and financial problems. The 16-page petition was filed in U.S. Bankruptcy Court in Detroit….
The Chapter 9 filing could take
years, experts say, despite hopes by the governor and Orr that the case
can be wrapped up in a year. A bankruptcy judge could trump the state
constitution by slashing retiree pensions, ripping up contracts and
paying creditors roughly a dime on the dollar for unsecured claims worth
$11.45 billion.
During a month of
negotiations, Orr has reached a settlement with only two creditors: Bank
of America Corp. and UBS AG. They have agreed to accept 75 cents on the
dollar for approximately $340 million in swaps liabilities, according
to a source familiar with the deal.

$18 billion may not sound like much, but the problem is that due to the way debt is stacked on top of debt, who knows how much more credit money will evaporate on the basis of its debt collateral having vanished.  And it’s not terribly surprising that the only creditors who are getting away without too much damage are the largest US bank and the largest Swiss bank.  They know the score, and 75 cents on the dollar is actually better than the average 60 cents on the dollar which their nominal assets are worth.

Where it’s going to get very interesting is when either Illinois or California attempts to declare bankruptcy, or, as a sovereign State, simply eliminate its debts by fiat.