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CBO Has Started Weighing The Benefits Of Bankruptcy Or Default For Local Governments

The Congressional Budget Office has a note out today warning of the fiscal stress faced by local government. The chart on right shows how much revenues are down -- with more stress is expected as home prices decline.

The ten-page brief includes a long discussion on bankruptcy versus default. The CBO seems to prefer:

One key advantage of bankruptcy is the “automatic stay,” which is issued by a court and prevents creditors from taking action against the municipality and its officials without approval from the court...

Another important advantage of bankruptcy is that courts can implement a restructuring plan without the consent of every creditor...

The bankruptcy process may also allow a municipal government to reduce its labor costs by facilitating the consent of employee unions to changes in labor contracts....

Formal discussion by the CBO suggests these options could become a reality.

So far states and cities have avoided bankruptcy or default, with Michigan rejecting bankruptcy applications from the City of Hamtramck. But just in Michigan, Gov-elect Rick Snyder says hundreds of cities face bankruptcy soon.

Click here to see charts on the drastic revenue collapse for cities >



Read more: http://www.businessinsider.com/cbo-fiscal-stress-faced-by-local-government-2010-12#ixzz17jvN3n4U


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.