Alabama's Jefferson Country, which has been teetering on the verge of bankruptcy for years courtesy of $3.2 billion in bonds related to its sewer system (a deal which has not made JP Morgan many friends south of the Mason Dixon line over the years), may soon decide to unleash the spring-loaded municipal bankruptcy dominoes. Reuters reports that "bankruptcy is still a "very strong possibility" for Alabama's Jefferson County, Governor Robert Bentley said on Saturday -- a move that could make for the largest municipal bankruptcy in U.S. history. "It is still on the table, and it's a very strong possibility," Bentley told Reuters during the National Governors Association meeting in Utah's Salt Lake City. The county is observing a "standstill period" to allow settlement talks with creditors, and this week it finalized a plan aimed at settling the debt to present to creditors." And while the municipal insolvency tsunami is merely a matter of time (it would be amusing to watch the army of Whitney bashers retract), the greatest irony would be if the Federal government were to file first, a move which as Moody's already noted would immediately send 7000 munis down the Chapter 9 rabbit hole as well, effectively bankrupting the entire $2.9 trillion municipal bond market overnight.
From Reuters on why Jefferson County would merely be the tipping point:
A handful of U.S. cities and counties have teetered toward economic collapse in the wake of the 2007-2009 recession, which created budget emergencies in most U.S. states,
Two years ago, Vallejo, California, filed for bankruptcy. The Pennsylvania state capital of Harrisburg is reviewing a rescue plan designed to avoid a bankruptcy filing.
New York's Nassau County has been under state oversight since 2000 and in January the state seized greater oversight powers. The tiny Rhode Island city of Central Falls is now effectively run by a state-appointed receiver.
In a separate interview, Rhode Island Governor Lincoln Chafee said it is an "ongoing discussion" as to whether Central Falls would seek bankruptcy protection, but added that he is concerned such a move could hurt other cities.
Granted a bankruptcy is not a given yet for all the traditional reasons:
Bentley said his view of bankruptcy -- an unpopular option because it is expensive and could freeze the county out of the bond market -- has evolved and he is now concerned it could create an "image problem" for the county and state.
The county's main city, Birmingham, is Alabama's largest and the county is a significant driver of the state's economy.
"We're trying to recruit industry in Alabama, and we're trying to recruit industry ... and I really think that hurts us when we have the largest bankruptcy," he said.
"If there's any way that we can negotiate a settlement short of bankruptcy, that is our position."
Unfortunately the decision is no longer in the hands of the county: it is in those who bought the syndicated bonds.
Bentley said he is not open to sending money to the county. He also said he would agree to support forms of credit enhancements for new county debt, but the state would not guarantee that debt.
"We would support it only with backing from the county," he said. "We're not guaranteeing the debt."
Bentley said an increase in sewer fees would be necessary to generate funds for debt payments, but the increases should not exceed 10 percent.
"We can't allow them to have 25 percent increases, that type of thing," he said.
The problem is that with the Federal government retrenching on fiscal largesse for a long time, and downstream bailouts of local and municipal governments thus becoming a very big question mark, creditors may realize that the infinite bailout ploy is ending, and could very well scramble to extract as much money as possible while the money is still available. The biggest question mark is what develops in DC this week which will be the determinant for how numerous credit committees, not only in Alabama but across corporate America, perceive their probability of getting paid, and, as a result, accelerate prepayment demands from the obligors.