Muni Bondholders Might Take Next Big Haircut [UPDATED: Crew Cut]
Move over Cyprus, the looters are swarming over Stockton. The city is in bankruptcy, and an important decision will come down today:
Bond-holders, taxpayers and government officials throughout the country will be listening to U.S. Bankruptcy Judge Christopher Klein’s expected ruling on Monday as he decides whether the city may remain in bankruptcy and pursue a plan that stiffs its bond-holders.
If Klein sides with the city, then municipalities will face a disturbingly low bar for pursuing bankruptcy. They will be emboldened to choose Stockton’s course—i.e., using bankruptcy as a strategic policy tool to offload debts without having to confront the main reasons that they went bankrupt in the first place, such as lush pensions. Bankruptcy will no longer be a policy of last resort. This should have an impact on bond markets.
If the city wins the case, argued March 25-27 in the Sacramento federal courthouse, then the public-sector unions and the scandal-plagued California Public Employees Retirement System are right. No matter what problems befall a city, public services and taxpayers suffer first while union members and public retirement systems are protected.
Just ask Chrysler bondholder if it's possible to have the law set aside to protect the unions in Obama's America.
UPDATE: As if on cue, the bankruptcy judge moves against the bondholders.