More than 100 U.S. cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark an urban catastrophe, a leading analyst has warned.
Meredith Whitney, the U.S. research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the U.S. economy, and one that could derail its recovery. “Next to housing, this is the single most important issue in the U.S. — and certainly the biggest threat to the U.S. economy,” Whitney told the CBS “60 Minutes” programme on December 19.
“There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see 50 to a 100 sizeable defaults, more. This will amount to hundreds of billions of dollars' worth of defaults,” she said.
New Jersey's governor, Chris Christie, summarised the problem succinctly: “We spent too much on everything. We spent money we didn't have. We borrowed money just crazily. The credit card's maxed out, and it's over. We now have to get to the business of climbing out of the hole. We've been digging it for a decade or more. We've got to climb now, and a climb is harder.” American cities and states have debts totalling up to $2tn (£1.3tn). In Europe, local and regional government borrowing is expected to reach a historical peak of nearly €1.3tn (£1.1tn) this year.
Cities from Detroit to Madrid are struggling to pay creditors, including providers of basic services such as street cleaning. Last week, Moody's ratings agency warned about a possible downgrade for Florence and Barcelona and cut the rating of the Basque country in northern Spain. Lisbon was downgraded by the rival agency Standard & Poor's earlier this year, while the borrowings of Naples and Budapest are on the brink of junk status. Istanbul's debt has already been downgraded to junk.
U.S. states have spent nearly $500bn more than they have collected in taxes, and face a $1tn hole in their pension funds, said the CBS programme, “The Day of Reckoning”.
Detroit is cutting police, lighting, road repairs and cleaning services. The city, which has been on the skids for almost two decades with the decline of the U.S. auto industry, does not generate enough wealth to maintain services for its 900,000 inhabitants.
The nearby state of Illinois has spent twice as much money as it has collected and is about six months behind on creditor payments. The University of Illinois alone is owed $400m, the CBS programme said. California has raised state university tuition fees by 32 per cent. Arizona has sold its state capitol and supreme court to investors, and leases them back.
Potential defaults could also hit Florida, whose real estate bubble burst two years ago, said Guy Benstead, of Cedar Ridge Partners in San Francisco.
In Europe, where cities have traditionally relied more on bank loans and state transfers than bonds, financing habits are changing. “Cities are on their own. Governments won't come to their rescue as they have problems of their own,” said Andres Rodriguez-Pose, professor of economic geography at the London School of Economics.
Istanbul
Turkey's ancient metropolis is one of the few European cities with a “junk” credit rating. Its impeccable location, linking Asia and Europe, does not compensate for its serious weaknesses — including “low revenue flexibility and a lack of predictability regarding future reforms”, according to a recent report from the Standard & Poor's credit-rating agency. The city also has high investment demands, leading to large deficits, and mounting debt, the agency said. It is trying to develop other sources of income, especially by developing its emerging financial industry, hoping that new glass towers will appear on its famous skyline of mosque domes and minarets. The Prime Minister, Recep Tayyip Erdogan, said this month that he planned to move the stock exchange across the Bosphorus to the Asian side of the city as part of plans to turn the Atasehir district into a financial centre. Naples The credit rating on this historic city in southern Italy is just one notch from junk level. If 2,000 years ago the nearby town of Pompeii was a model of public administration, today's Naples has one of the lowest tax-collection rates in Europe — and the worry is that not enough is being done to change it.
With higher unemployment and a greater dependency on state and EU help than other Italian capitals, Naples faces increasing delays in paying for some of its running costs. At least the city — with a population of almost a million — has a higher percentage of children than the national average and a lower percentage of over 65s, limiting the costs of its care for the elderly.
Florence
The Tuscan capital was warned about a possible credit downgrade last week, following its decision to stop payments on some derivatives contracts to banks including UBS and Bank of America. In 2006, the city signed contracts with a group of banks, setting a fixed interest rate on about €200m (£170m) of debt. The move was aimed at protecting the city coffers from any potential interest rate rises. Florence, however, has been caught out by two years of record low interest rates, which make their current agreement substantially more expensive than prevailing market rates. Florence, due to pay the banks €9m this month, now says that it would be illegal, under Italian law, to honour those obligations. Some of the creditor banks have already filed a claim at London's high court. S&P has an A+ rating on the city, one of its highest, based on the strength of its tourism industry.
Madrid
Spain's capital city, with a staggering €7bn of debt, was recently stopped from rolling over some of its obligations by the central government. Years of a booming property market pumped up the city coffers, leading officials to start multibillion-euro projects such as covering the city's orbital motorway. In 2007, at the peak of the market, the city hall also moved buildings in a change that cost locals millions. But the tax take has fallen sharply while the doors to international financial markets remain mostly shut. Investors are worried about the city's high debts, projected to reach as much as 155 per cent of its revenues by 2012. Madrid's payments to some of its trade creditors, including cleaning service contractors, are severely delayed.
Barcelona
Catalonia's capital was placed on review for a possible downgrade by Moody's last week, amid plunging revenues and a tougher control on central state transfers. Despite the recent tourism boom, Barcelona and Catalonians are struggling to recover from the effects of the property sector's collapse.
The regional government recently had to issue bonds to its own citizens as it faces ostracism by international bond investors, given its high debts. However, with almost 1.6 million inhabitants, Barcelona is still one of Spain's richest cities, S&P said.— © Guardian Newspapers Limited, 2010
