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Bond market cool to Michigan after Detroit bankruptcy

It looks like Michigan municipalities are finding the bond market a tough go after Detroit’s historic bankruptcy filing.

Michigan cities and school districtssold just $71.5 million worth of municipal bonds in August.

That’s the lowest amount of monthly bond issues for the state since 2003. And it’s a sign that Detroit’s bankruptcy is hurting municipalities’ ability to borrow money.

Several cities and counties—including Battle Creek and Genessee County--have pulled back on planned bond sales in the past six weeks.

Cate Long, who blogs about the municipal bond market for Reuters, says that in some cases, the deals were squelched by high interest rates.

In others—including a planned $350 million offering from Oakland County—Long says it’s less clear what happened.

“Every bond deal has issues that come up, or problems,” Long said. “There’s usually enough momentum and confidence to get over the problems and get the deal done. So it says a lot when a series of deals in Michigan have been pulled.”

Long says this might be a case of “bond vigilantism.”

That’s when bond markets essentially act to punish bond issuers for perceived “bad behavior.” In this case, it’s Detroit emergency manager Kevyn Orr’s proposal not to honor Detroit’s “general obligation” bonds—usually considered rock-solid investments honored before virtually all other debts.

“I think he’s in very dangerous waters right now that aren’t going to impact just Detroit but other municipalities,” Anthony Minghine, associate executive director of the Michigan Municipal League, told The Detroit News in July. “It will change fundamentally how that debt can be sold, marketed and how it would be viewed by investors in the marketplace.”

Long says the state’s response since Detroit’s bankruptcy filing hasn’t made investors feel any more secure.

“And I would say most of it relates to the Governor,” Long says. “And his kind of bad-mouthing Wall Street, and saying that ‘People should’ve seen this coming for Detroit…and we don’t have a responsibility to backstop this debt or help out in any way.’”

Governor Snyder has said Detroit is an “incredibly unique situation,” and its bankruptcy shouldn’t affect other Michigan cities.

Sarah Cwiek joined Michigan Public in October 2009. As our Detroit reporter, she is helping us expand our coverage of the economy, politics, and culture in and around the city of Detroit.
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