In the 1970s, New York came close to bankruptcy

In 1975, following the explosion of public spending and the deindustrialization of the territory, New York’s debt peaked at 13 billion dollars (9.5 billion euros). Most public services were idling. The city narrowly avoided bankruptcy thanks to a federal loan.

If like New York, Cleveland and Philadelphia also came close to bankruptcy, only about sixty American cities have, since the 1950s, been admitted under “Chapter 9”, the mechanism for bankrupting municipalities. This is only implemented when all other options have been explored. “It makes it possible to open a negotiation between the creditors on the restructuring of the debt, without any one being able to use before the others, for example by seizing buildings of the city”, explains Ulrich Hege, at HEC. More often than not, Chapter 9 is accompanied by cuts in public spending.

DECISION OF THE FEDERAL COURT

In 1994, Orange County, California, was bankrupted after hazardous investments by its treasurer. Its debt then amounted to 1.7 billion dollars. Unsurprisingly, the municipal routs increased after the shock of the subprimes. In 2011, Jefferson County, Alabama, decreed it could not pay off its $ 3 billion in debt. In question, a pharaonic sewer construction project, the cost of which soared with the crisis. In June 2012, after the fall of the real estate market and their tax revenues, the cities of Stockton and San Bernardino, in California, could not meet their deficits (respectively 26 and 46 million) and debts (700 million and 1 billion) .

If the Federal Court approves the procedure, Detroit, with its debt approaching 19 billion, will be the largest municipal bankruptcy recorded in the United States.

Puerto Rico is an exception. If the island has been bankrupt for several years, it has not been placed under the chapter 9. “It is part of American territory but enjoys a separate status, much less protective”, explains Lewis Feldman, lawyer at the American firm Goodwin Procter. Several vulture funds have placed their marbles there. “Even if it’s complicated legally, the market is as promising for them as in Detroit”, says Lewis Feldman. There are no small profits …

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