Damn deadbeats should of known better…
The housing crisis was fueled by cash-strapped homeowners who walked away from their mortgages. Some analysts and investors now are worried about the same problem happening with debts of cities and towns.
For more than a year, Menasha, Wis., hasn’t paid back about $23 million in principal for short-term notes tied to a failed steam plant, even though the deal’s offering documents include a statement that the city would use tax revenue to cover any debt payments, if needed.
But that statement “was no guarantee” to repay the debt, says Edward Fuhr, a lawyer for Menasha, a small industrial city that has spent an average of $80,000 a month to fight investor lawsuits in three courts over the notes, which matured in September 2009.
The tangle underscores concern in the municipal-debt world about the longstanding assumption that local governments will do whatever it takes to repay their debts—including raising taxes—because failing to do so would make it more expensive or even impossible to turn to investors for future financing.
Such cases are rare but could increase in number as municipal governments struggle to meet their obligations on projects that have run into trouble. The greatest default risk is in small municipalities with overleveraged projects buffeted by the recession. Those places also might need to access credit markets less in the future than big cities, making it easier to walk away from their debt.
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