A recent ruling by US Federal Judge Rhodes has held that the city of Detroit is eligible to file for bankruptcy under US federal bankruptcy laws and can now attempt to re-organise its US$18.5b debt.
In a nine-day trial, Detroit's labour unions, retirees and pension funds (who would bear the brunt of proposed austerity measures) argued against the city's eligibility for bankruptcy on the basis that it was contrary to Michigan's state constitution. In permitting the bankruptcy, Judge Rhodes found the law permitting Detroit to file for bankruptcy was constitutional and that the city met every test for federal insolvency as it was unable to pay its debts, was failing to provide a minimum level of basic services to its residents and would face an unfeasible task in negotiating with its thousands of creditors. Importantly, he also ruled that public pension benefits (which are protected under Michigan's constitution as contracts) could be reduced in a municipal bankruptcy as federal law trumped state law. The result will now allow Detroit to take steps in re-adjusting its debt, chiefly by forcing creditors to take a discount on what the city owes them.
See Court decision here.