Coming wave of Municipal and State Bankruptcies

The New York Times
U. S. Path Is Sought For States To Escape Debt Burdens
http://www.nytimes.com/2011/01/21/business/economy/21bankruptcy.html?hp

But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.

Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

My comments:  One of America's great strengths is its bankruptcy laws.  Which allow for an orderly default on liabilities, without wrecking the integrity of the organization defaulting.  Hence how General Motors is back as a fierce competitor in autos.

The Vallejo California bankruptcy was historic and looks to me like it will be used as the precedence for the coming wave of municipal bankruptcies and state bankruptcies.  In fact likely most cities and states will go bankrupt over the next 10 years.

The judge in the case ruled that Vallejo has a duty to provide basic services to its citizens and only after that is properly paid for will remaining monies be split between the creditors.  Which he ruled a default on the pensions and for the bondholders they are likely to get between 5 and 20 cents on the dollar.

States and municipalities are notgoing to be forced to cut services to nothing while still paying pensions and bondholders.  Instead when they can no longer comfortably afford to pay both, the court system is going to let them legally default on their debts.

This is going to make a stronger and healthier America, instead of going down a downward spiral.. but obviously pensions and bondholders are ---cked.