Michigan could soon face higher borrowing costs in the U.S. municipal bond market after Detroit's emergency manager took controversial actions that may imperil the full repayment of debt across the state, market analysts said.

Kevyn Orr, the corporate bankruptcy attorney the state tapped in March to run Detroit, stunned the $3.7 trillion market in June by suspending debt payments on bonds he considered unsecured, including some of the city's voter-approved general obligation bonds. That was part of his sweeping plan to fix the finances of the cash-strapped city that has been plagued by years of declining population and falling revenue.

Unsecured creditors face receiving pennies on the dollar or the potential Orr would be allowed to file what would be the biggest Chapter 9 municipal bankruptcy ever.

BlackRock, which owns Detroit bonds as part of its $114 billion of municipal assets, said Detroit's plan could impact the borrowing conditions of the state and other local issuers. It noted other states with troubled large cities have stepped in to ensure debt payments were made.

"Michigan's failure to intervene on Detroit's behalf could result in higher interest rates for other municipalities across the state," BlackRock wrote in a report on Monday, adding there was also the potential for lower credit ratings.

The yield premium paid by Michigan, rated Aa2 by Moody's Investors Service, rose last week in the muni market, which states, cities and counties use to finance infrastructure improvements such as bridges, schools and roads.

In the week ended June 28, Michigan's so-called credit spread for its 10-year GO bonds rose to 40 basis points over the market's benchmark yield scale for triple-A-rated debt, indicating that investors are demanding a higher yield to own the debt. It had been at 35 basis points over Municipal Market Data's scale for 30 weeks.

In his June 14 proposal to creditors, Orr said the city would stop paying on $11.5 billion of unsecured debt, starting with a default on $1.45 billion of insured pension obligation certificates of participation.

He also proposed that all unsecured creditors get a pro-rata share of $2 billion of notes the city would issue and pay off as its financial circumstances improve. Orr, who has said there is a 50/50 chance Detroit could land in bankruptcy court, is pushing for creditors, including bond insurers and unions, to agree to his plan.

The decision to consider all unsecured creditors alike, including holders of unlimited tax GO bonds, which have until now been considered the most senior form of debt in the muni market, could have important consequences.

"Treating all creditors equally calls into question the value of the 'full faith and credit' pledge bestowed to holders of GO bonds and could have far-reaching implications in Detroit, in Michigan and beyond," said BlackRock's report by Peter Hayes, head of the firm's municipal bond group, and James Schwartz, head of credit research.

Spokespersons for Michigan Governor Rick Snyder and Treasurer Andy Dillon did not immediately respond to a request for comment on the state's widening credit spread.

Nuveen Investments, another mutual fund company that holds Detroit bonds, said Michigan and its local governments would likely see higher borrowing costs or even struggle to sell their debt if the state does not require Orr to adhere to the city's pledge on its GO bonds before allowing Detroit to file for bankruptcy.

Nuveen said the moratorium on debt payments goes beyond the authority granted to Orr under a 2012 Michigan law governing emergency managers running fiscally stressed cities.

The law that took effect in March requires the managers to produce a financial and operating plan that must provide for "the payment in full of the scheduled debt service requirements on all bonds, notes, and municipal securities of the local government..."

Orr's plan, released on May 12, stressed the need for "significant and fundamental debt relief." It outlined options such as restructuring outstanding debt to push principal payments into future years, permanently reducing the amount of principal, lowering interest rates or issuing new debt to provide cash recoveries to creditors.

Bill Nowling, Orr's spokesman, said the emergency manager was acting within the letter and the spirit of the 2012 law.

"[The law] gives the emergency manager the authority to vacate contracts," he said. "There is also the practical issue of the city not having the money to service its debts."

Nowling added that Orr's June 14 report to creditors represented a proposal and that Orr reserves the right to negotiate independently with each creditor and stakeholder to produce a restructuring plan "that allows for a strong, viable and solvent Detroit."

But Michigan's laws and constitution could come into play if Detroit ultimately files for bankruptcy. A bankruptcy court can't interfere with the property, revenue, and affairs of the city without its consent, according to Jim Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler.

"If state law confines what they consent to, you could wind up with some restrictions," he said.