Buttonwood: The battle of Detroit

IT WAS inevitable that the rights of creditors and pensioners would come into conflict, especially in places that suffer from high debts, sluggish growth and an ageing population. Admittedly Detroit, where a bankruptcy plan proposes deep cuts to the wealth of both bondholders and retirees, is an extreme example. But it does point to where future battle lines will be drawn.The city, which filed for bankruptcy last year, has an estimated $18 billion of debt and has seen its population fall by more than half since 1950. There are no easy solutions. Retired workers will face an immediate 34% cut in their income, although police and firemen will only suffer a 10% hit; these reductions will be trimmed if they agree to a quick deal. (The same reductions apply to the accrued benefits of existing workers, although the final-salary pension scheme will stay open.) On the creditor side, secured bondholders will be repaid in full but unsecured creditors (deemed to include, controversially, holders of general-obligation bonds) will get only 20 cents on the dollar.It does not seem unreasonable that retired workers should be treated more generously in bankruptcy than unsecured...

via The Economist: Finance and economics Business Feeds

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