Economy Watch: Detroit Files for Chapter 9

By Dees Stribling, Contributing Editor

On Thursday, Detroit became the largest city in the nation ever to file for the municipal version of bankruptcy, Chapter 9. The city faces a mass of liabilities— roughly $18 billion by most accounts—but the move was decades in coming. The city is a shadow of its former self, both in terms of population and business activity, and so is its tax base.

Earlier this year, the state of Michigan appointed an emergency manager for the city, Kevyn Orr, who has since been negotiating with Detroit’s many bondholders and other creditors about restructuring the city’s debt. Those negotiations were at an impasse this week, with the fate of about $11 billion in unsecured debt proving especially contentious.

Now follows months, or more likely years, of legal wrangling. The case is unprecedented, in that no city this size has ever filed for bankruptcy protection. Even New York in the mid-1970s, when it was barely able to meet its obligations, didn’t actually resort to filing for bankruptcy. The largest cases of Chapter 9 municipal bankruptcy so far have been counties, not cities: Jefferson County, Ala., in 2011, and Orange County, Calif., in 1994.

Bernanke says tapering still likely

Fed chairman Ben Bernanke wrapped up two days of testimony before Congress on Thursday—it was his semi-annual report to the legislature branch—by saying that most members of the Federal Open Market Committee (probably) support tapering down the Fed’s monthly bond purchases, which are currently at a pace of $85 billion each month. The tapering might begin as soon as September. “The general scenario I described at my (June 19) press conference is generally supported by people on the committee—both voters and non-voters,” Bernanke told the Senate Banking Committee.

The chairman stressed (once again) that tapering would depend on the state of the economy going forward. On Wednesday, he’d outlined some of the headwinds that the economy still faces. On Thursday, he said the central was keeping an eye on those headwinds: “Obviously, we’re going to look at the data,” he noted.

Separately on Thursday, Moody’s Investors Service revised the United States’ credit outlook from negative to stable on its rating of Aaa (which is still the highest rating). The negative outlook on the nation’s sovereign debt has been around since the summer of 2011, when some members of Congress made noise about letting the country default. The rating service cited lower federal deficits and stronger economic growth as reasons for its move.

Initial unemployment claims drop

The U.S. Department of Labor reported on Thursday that for the week ending July 13, initial unemployment claims were 334,000, a decrease of 24,000 from the previous week. The less volatile four-week moving average was 346,000, a decrease of 5,250 from the previous week.

Wall Street experienced an up day on Thursday, with the Dow Jones Industrial Average gaining 78.02 points, or 0.5 percent, while the S&P 500 advanced 0.5 percent as well. The Nasdaq eked out a tiny gain of 0.04 percent.