WASHINGTON — Detroit’s bankruptcy could undermine the long-held belief about city obligation bonds and whether they should be trusted, at least that is what researchers at the Chicago Federal Reserve Bank said last Friday.
Reuters reported that the general obligation bonds, which are the most frequently sold form of debt on the U.S. city bond market, could see itself become more risky in the eyes of investors and could drive down demand.
Detroit’s bankruptcy case, where their state-appointed emergency manager Kevyn Orr may treat general obligation bonds (or GOs) as debt equal to pension obligations, could mean that these GO bonds will become more unattractive to investors. GO bonds are a primary mechanism where cities, states, hospitals and school districts raise cash for capital projects.
Looks like Democrat Detroit is going to affect the market and economy in more ways than one.