DETROIT (Reuters) – A federal judge on Wednesday gave Detroit and a group of bond insurance companies two or three weeks to settle a dispute over whether the city can treat certain bonds as unsecured debt, warning of an “all or nothing” ruling if no deal is reached.
The outcome of the dispute could significantly affect the $3.7 trillion municipal bond market, where general obligation bonds backed by the full faith and credit pledge of cities, school districts and others has long been considered sacrosanct.
If the general obligation debt in question is ruled to be unsecured debt in this case, asDetroit's lawyers argue, it could result in investors demanding higher premiums to lend to the city and other local governments in Michigan.
Detroit, which filed for bankruptcy in July, defaulted on the voter-approved general obligation bonds in October, prompting three bond insurance companies that were on the hook to make up the payments to sue the city.
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