DETROIT (2)

Back in August, Detroit seemed certain to go into bankruptcy. However, not everybody had an interest in seeing that happen. Foremost amongst them were former municipal employees, whose unfunded pension liabilities make up around half of the city's US$18 billion debt. They sued the state-appointed emergency manager in order to prevent his bankruptcy petition from taking place.

That attempt has failed. The judge handling the petition said that bankruptcy, and the protection which it gives the city from its creditors, was a "foregone conclusion" and the only possible way forward. The emergency manager will now put forward a plan to deal with Detroit's 100,000+ creditors. That plan will almost certainly include cuts in those otherwise sacred pension liabilities.

Detroit's bankruptcy is not only interesting in its own right, but will give some clues as to how America will deal with the colossal problem of unfunded (and unaffordable) state and municipal pension commitments, which run into the trillions of dollars. In particular, the idea that those commitments are untouchable will be tested and discarded.

Walter Blotscher