Harrisburg, Pennsylvania’s capital city, reportedly may file for bankruptcy this year, and some Wall Street traders say the filing could well be just one among many by U.S. cities this year.
The city may be emblematic of a much bigger problem: The $2.8 trillion municipal-bond market, long considered one of the safest havens for investors, now faces a daunting level of debt, as cities from Los Angeles to New York struggle with an array of headaches, including lower tax revenue and higher labor costs.
Harrisburg is a prime example. The city owes nearly $70 million in debt payments this year, and has a budget of $60 million, which is why it now has one of the lowest credit ratings of any municipality in the United States.
Indeed, MCDX, the index that tracks the cost of insuring against default of a basket of 50 municipalities, is on a recent high of $173,000 for $10 million of protection on a five-year bond — a point last reached near the beginning of this year.
A swap that would pay out if the state of Pennsylvania defaults cost $112,000 for the same $10 million amount.
Harrisburg Mayor Linda Thompson has assembled a group of bond stakeholders, the city council and other interested parties to work out the crisis "so that we don't become the poster child of the world in terms of bankruptcy."
In an editorial in the Wall Street Journal earlier this month, former Los Angeles Mayor Richard Riordan argued that the city will likely have little choice but to declare bankruptcy between now and 2014.
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