EEUU

Is Detroit putting Germany in check?

Oscar Ugarteche, Ariel Noyola Rodríguez

08/09/2013

Opinión

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Municipal bankrupties in the United States have behind them the traumatic experience of the fiscal crisis of New York in the 1970s. Headed by Walter Wriston of Citibank, the "Great Bank" managed the bankruptcy of the Big Apple and showed that the interests of financial institutions take priority over the welfare of citizens (1). The cost of the bankruptcy was the destruction of the municipal social welfare services set up in the 1930s.

Now, in the Twenty-first century, we have a new municipal bankruptcy in Detroit. Founded in 1701, located in the state of Michigan and with an area of 370 square kilometres, the city declared itself technically in bankruptcy on July 18 with a debt of 18.5 billion dollars. It’s the biggest bankruptcy registered in the United States since the default of Jefferson County, Alabama, in 2011 for 4.2 billion (2). The "financial implosion" of Detroit has more to do with the decline of the position of the United States in the world market for automobiles and less with the financial crisis of 2007-2008. What has happened is a process of industrial delocalization towards Mexico and Canada and a growing competition from their German (VW, Mercedes and BMW) and Japanese (Honda, Nissan and Toyota) equivalents, as well as the Tata group of India and the growing Chinese auto industry (FAW, Geely Holdings Group Co. Ltd, Shanghai Automotive Industry Corporation, etc.).

From a population of two million inhabitants during the industrial highpoint in the decade of the 1950s, now Detroit has a population of some 700,000. Between 2000 and 2010 it lost 250,000 inhabitants, the equivalent of one person leaving every 20 minutes (3). Unemployment rates are at 12%, while the national average is 7.6%.

During the past few years, the municipal financial needs have been covered with the support of bonds backed up by the State of Michigan. Nevertheless, the bankruptcy came through the failure to pay up on the due date of different bond emissions. The greater part of the debt (about 50%) is made up of unfunded obligations of pension plans and health care expenditures for retired workers. Of the 18.5 billion in debt, there are 8.2 billion in negotiable paper which are backed by insurance companies, highly desired by hedge funds that regard this paper as very lucrative in the long term (4).

The Detroit bankruptcy has put the European bank in check given its high level of exposure to U.S. "municipal bonds". In 2004, when Detroit tried to recapitalize the pension funds of its workers, it went to the Swiss UBS bank, institution that placed 1.4 billion in "municipal bonds", acquired from banks all over the world, including the German Commerzbank, the second biggest in Europe after the Deutsche Bank. With the bankruptcy, now it is known that the municipality can barely offer 30 cents for each dollar in stocks (5).

The DAX index of the Frankfort Stock Market could fall due to new losses of the Commerzbank, already hard hit by Greece, Spain, and the slowing of growth in Germany between 2008 and 2013. The negative effect of this on internal German credit could throw overboard the presumption of the Eurozone to have overcome the recession during the second trimester of 2013 with a growth rate of 0.30%, pushed by the advance of France and Germany. Unemployment in the Eurozone was at 12.1% in July 2013, with a total of 19.2 million persons unemployed; a million more than in 2012. Germany accounted for 2 million 946 thousand, or 15.7% of the total number of unemployed.

The financial problems of U.S. cities are part of the general deterioration of the U.S. economy in its three levels of government, and these are greater since the global crisis of 2008 (6). Between 1989 and 1995 there were 93 municipal bankruptcies in U.S. territory, and from 2010 to date there are 37 (7).

In a critical condition are San Bernardino, Stockton, Orange County and Vallejo in California; Harrisburg in Pennsylvania and Central Falls in Rhode Island. In the majority, unemployment has grown strongly since 2008 while the costs of pensions and health programmes have shot up (8). The outcome of these bankruptcies may include more concentration of income in the financial sector at the expense of a lower social salary. Measured in accord with the threshhold of family incomes (this varies with the number of persons in the family) (9), there are 46 million people living in poverty in the United States, according to Census figures for the country (10), a record since 1959 when they started to count.

All things considered, the United States could complicate the weak recovery of the world economy with the bankruptcy of Detroit and its multiplier effect on the European bank crisis. Bernanke avoided a depression with deflation but there is nothing to ensure that there will be a vigorous recovery. We might remain in recession for a while, and see more contagion.

(Translated for ALAI by Jordan Bishop)

- Oscar Ugarteche is a Peruvian economist, he works in the Instituto de Investigaciones Económicos de UNAM, Mexico. He is a member of SNI/Conacyt. Coordinator of the Observatorio Económico de America Latina (OBELA) www.obela.org and President of ALAI www.alainet.org

- Ariel Noyola Ridríguez is a Member of the OBELA Project, IIEC-UNAM. Contact: anoyola@iiec.unam.mx

www.obela.org

1) See Harvey, David. Breve historia del neoliberalismo. Ed. Akal: España, 2007.

2) See “Details of Detroit’s troubles come to light”, en Financial Times, in <http://on.ft.com/15AWICN>. Publication date: 25-07-2013.

3) Brooks, David. “Éxodo, trabajo y murales” en La Jornada, en <http://bit.ly/14Vyx6e>. Publication date: 28-03-2011.

4) See “Bonos de Detroit, los más codiciados”, en CNN Expansión, in <http://bit.ly/17JTbc2>. Publication date: 29-07-2013.

5) Moreno, Marco Antonio. “Quiebra de Detroit crea un gran lío en Alemania”, in El Blog Salmón, <http://bit.ly/15vBzk7>. Publication date: 28-07-2013.

6) Jacobs, Gilda. “Detroit’s financial problems don’t stop at city limits”, in Detroit News, en <http://bit.ly/15pYkQs>. Publication date: 21-08-2013.

7) See “Bankrupt Cities, Municipalities List and Map” en Governing Data, in <http://bit.ly/Th3FFg>. Date updated: Agosto, 2013.

8) See “America’s public finances. The Unsteady States of America”, in The Economist, <http://econ.st/18AsNMJ>. Publication date: 29-07-2013.

9) See “How the Census Bureau Measures Poverty” en Census Bureau U.S., in <http://1.usa.gov/bz4bFZ>.

10) See “El 80% de los estadounidenses se asoma a la pobreza alguna vez en su vida” in Russia Today, <http://bit.ly/18oOpwP>. Publication date: 29-07-2013.

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