Felix Salmon

Harrisburg defaults

By Felix Salmon
September 1, 2010

The Daily Beast kicked off this week’s offerings with a slideshow listing “20 Recession-Proof Cities”: the ones with high pay and sustained economic growth. I’m not entirely clear on how to link to any given city on the list, but if you click through you’ll find Harrisburg, Pennsylvania at #7, the very picture of a hale urban center.

Which is now defaulting on its municipal debt. It’s the largest municipal default of the year, after Jefferson County in Alabama, and it surely presages more to come.

It also shows the moral hazard of bond insurance:

A missed payment is “a bad signal,” said Alan Schankel, managing director at Janney Montgomery Scott in Philadelphia, adding that it raises the concern that some distressed issuers may be more likely to skip bond payments guaranteed by insurance companies.

It’s worth noting that Jefferson County, too, had its bonds wrapped by an insurer.

No one explains this better than Warren Buffett, who laid it all out in 2009: the people running municipalities are far more likely to default if they end up harming only insurers than they are to default directly on their bondholders — who are also likely to be their personal friends and colleagues.

Which might partially explain — along with an incinerator fiasco — why Harrisburg, which is doing quite well, economically speaking, has now contrived to default.

5 comments so far | RSS Comments RSS

I think you have too narrow a perspective. Harrisburg and others have broken the code.
The Federal government is incapable for idealogical reasons of provide needed state and municipal aid.
By shifting their deficits to insurers who will go broke and be bailed out by the Federal government because, well just because, municipalities get their much needed aid in a socially beneficial (bonuses to the insurance company CEO’s) manner. [/snark]

Posted by msobel | Report as abusive

Five cities a week are going bust these days

Posted by STORYBURNthere | Report as abusive

A chapter in history. Those who cannot remember the past are condemned to repeat it.

http://www.uscourts.gov/FederalCourts/Ba nkruptcy/BankruptcyBasics/Chapter9.aspx

Posted by hsvkitty | Report as abusive

My roommate from grad school is a prominent educator in Harrisburg: “Yep, it’s all true. The story behind the story is that our mayor of 28 years was defeated last year by a brash city council president who blocked the plan to prevent default that the previous mayor had fashioned. In her now 8 months in office more than a third of the city’s capable government people have left and those she’s appointed have lasted at most 6 weeks before throwing up their hands in disgust and saying “She’s crazy!”. As you can imagine they are already lining up for the next election in 3 years and there is a recall movement gaining traction. Had she worried more about the city’s health than her election we’d not be reading the story you sent.”

Posted by walt9316 | Report as abusive

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