The history of city of Detroit could be explained in earlier years with words like Motown Records or the power of the US Auto Industry. Today one thinks of Detroit as the film setting for Robocop (…please put down your weapon, you have 20 seconds to comply…) and the decline of a great city. Now today in a mess, it has declared bankruptcy. In the bankruptcy petition, it states 100,000 creditors make up the £12 Billion (US$18 Billion).

But who are the creditors who are owed £12 Billion ?

They are all the names of all of the city’s active employees & its retirees, a list of properties that have tax claims with the city, numerous bondholders such as municipal bonds issues by the city of Detroit, business creditors and companies that also insured Detroit debt. The single largest creditor is the city’s general pension scheme, which is owed $2 billion.

The facts will be resolved in the law courts, as the bond holders (creditors) will be offered some level of compensation for their losses (non payment of interest and principal capital), that will result in some sort of agreement, where the creditor is given something like 25 cents on the $1 owed, or something like that.

So what theoretically means, is that someone who lends Detroit money by buying bonds from Detroit (Detroit issues bonds to raise cash), now faces the prospect of losing (in my example) 75% of their capital. The risk going forward with that, is it takes a brave lender to lend to Detroit in the future, based on non-payment and bankruptcy of the past. This is best explained with the bankruptcy of Argentina in 2002. Defaulted on its debts, offered its creditors 10 cents on the Dollar, and has never been able to borrow on the international bond market. Frozen out of the capital markets.