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Who Takes Hit In City Bankruptcies: Bondholders Or Workers?

Wednesday, May 29, 2013 - 7:10 AM
From The LA Times:
The municipal-debt market has always rested on a simple notion — that local governments would do whatever they must to repay borrowed money.

Cities wouldn't want to default on their bonds, some of which are owned by their own citizens. And they wouldn't want to alienate Wall Street, which finances many of their civic projects.

The bankruptcies of Stockton and San Bernardino have shaken the decades-old faith in that premise, and turned the California cities into closely watched test cases for how municipalities grapple with deep-rooted financial problems.

... A broader issue is whether the bankruptcy filings could be seen as a way to reduce the stigma of budget shortfalls in general.

Investors fear that could prompt other cities to view bankruptcy as a suddenly legitimate antidote for long-nagging financial problems.

"Are cities that are struggling — Chicago, Los Angeles, you name it — going to look at this as their playbook?" said Marilyn Cohen, founder of Los Angeles bond investment firm Envision Capital Management Inc. "That's what we're all worried about."

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