Wednesday, November 20, 2013

Report casts doubt on Detroit's estimated debt: 'Simply inaccurate'

MSNBC says Report casts doubt on Detroit's estimated debt: 'Simply inaccurate'

"‘The real issue is about the cash, and in fiscal year 2014 it is about an $198 million cash shortfall,’ said Turbeville. He blames the shortfall on a number of factors, including the Great Recession, a dwindling tax base, and declining state aid. But pension obligations, which have stayed mostly flat over the past five years, are not a significant factor in Turbeville’s analysis.

A much larger factor appears to be city’s debt to Wall Street. As of 2011, Detroit owed $3.8 billion to major financial institutions because of financial instruments called interest rate swaps. Those swaps allow cities to trade variable interest rates on their municipal bonds to the banks in exchange for fixed-interest payments.

Cities across the country, including Detroit, bought up these swaps because fixed interest rates were more predictable, and therefore seemed safer; but when the federal government drove down interest rates in response to the financial crisis, banks ended up making billions off of swaps while municipalities were stuck with the bill. Now, Turbeville writes that those institutions ‘are now demanding upwards of $250-350 million in swap termination payments.’"

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