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What happens when a city defaults?

September 3, 2010 --

What happens when a city defaults?  The answer may impact your investments
By Albert Gallatin,

This week Harrisburg, Pennsylvania announced it would miss its quarterly scheduled bond payment.  Although holders of the bonds would still get paid, thanks to bond insurance which most investors demand from municipal issuers, the default by the city nonetheless is troublesome.  The failure of a State or local government to pay back their borrowings is extremely rare, which is part of the reason the government entities can borrow money at relatively cheap interest rates.  But the financial crisis in 2007 and the continuing economic malaise has put a severe strain on government resources.  And it is not just cities that are in desperate straights: some of America’s biggest States, such as California, New York and Illinois, appear to be on the brink of default.  California has already resorted once to issuing IOUs to some of its creditors, and may be forced to do so again in the near future.



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2010-09-03 13:28

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