Wednesday, December 5, 2018

MOODY'S WARNS INVESTORS ABOUT DETROIT

Five years since Detroit bankruptcy

Moody’s warns investors about Detroit’s mounting debt

By Debra Watson 
5 December 2018
Recent financial advisories from Moody’s Investors Service, one of the top three US credit rating agencies, warn that the city of Detroit’s failure to address economic problems in its neighborhoods and schools is threatening the ability of the city to meet post-bankruptcy obligations to its credit holders.
In back-to-back reports in November, Moody’s issued warnings about the financial arrangements that underlay the Detroit bankruptcy in 2013–14, the largest municipal bankruptcy in US history, and about financial shortfalls of massive proportions in the schools. The second report zeroed in on a deal with the state of Michigan to supposedly resolve the crisis in the city’s schools in 2016.
The financial advisory has been followed by the announcement by General Motors of 14,000 hourly and salaried job cuts, including the closing of the Detroit-Hamtramck Assembly Plant, that will further devastate Detroit and other struggling cities already hard hit by the 2008–2009 recession and decades of deindustrialization.
The 2013–2014 Detroit bankruptcy amounted to the rape and pillage of city workers, residents and retirees in the interests of Wall Street, in which hundreds of millions of dollars were taken from the pockets of city workers and pensioners and poured into the coffers of the hedge funds, banks and bondholders. Now the financial elite is warning that the tribute extracted was not enough.
Two years after the bankruptcy, the Detroit Public Schools (DPS) was dissolved into the Detroit Public Schools Community District (DPSCD). These fiscal machinations created a “new” and “old” school district to address debt obligations, along the lines of the 2009 auto reorganizations that created a “new” and “old” General Motors.
The so-called bailout of the Detroit Public Schools in 2016 was billed as relief for a district cash-strapped by decades of underfunding, in which emergency managers appointed by both Democratic and Republican governors carried out round after round of brutal cuts.
Conditions in the Detroit schools reached such a scandalous state that teachers staged unauthorized walkouts in the spring of 2016 in protest. Only with great difficulty were the Detroit Federation of Teachers and its national affiliate, the American Federation of Teachers, able to bring the incipient rebellion under control.
The reorganization of the Detroit schools was based on a scheme aimed at paying off creditors that did nothing to resolve the legacy of cuts. The financing utilized a state infusion of funds and private money, but was designed to keep the school system on rations. The arrangement left the “new” district, DPSCD, unable to borrow for years for any of the capital repairs it desperately needed for buildings in advanced disrepair.
Moody’s financial advisory along with the GM job cuts announcement punctures talk by Democratic Mayor Mike Duggan, the corporate media, and pundits and politicians of both major political parties of Detroit’s supposed comeback.

Moody’s initial November report referred to the $143 million in annual pension contributions Detroit must begin to pay a decade on from the bankruptcy crisis, starting in 2024. In that report, and a corollary one that followed, Moody’s also cautioned that the looming crisis in the city’s public school system threatens to put the brakes on revival plans for the city.
A July assessment conducted by the consulting firm OHM Advisors reported a staggering $530 million in capital needs and deferred maintenance is required for the district’s 100-plus school buildings in operation in the city. Delay in repairs could push the figure over $1.5 billion by 2023.
The Moody’s report attaches some real-world figures to the contrast between Detroit’s redeveloped central city and the shocking and persistent poverty and blight in the city’s vast working-class neighborhoods.
Moody’s notes that despite the 10,000 who have moved downtown, populating new and refurbished apartments, the city as a whole has lost a net 35,000 residents since 2010 as the neighborhoods continue to bleed. Unless the dire economic problems outside the seven square miles in the city’s center are tackled, tax revenue will fall short of goals.
One shocking index of the social crisis in Detroit are water shutoffs, which are on pace to match the 17,655 shutoffs last year. Bridge Michigan reported between 1,500 and 2,500 occupied homes are still without water after shutoffs this year and 900 had gone three months without running water. High poverty led to one in three Detroit homes in arrears for water at the time of the bankruptcy in 2014.
Gary Brown of the city’s water department has said overdue repairs to the water infrastructure in the city must be rationed. Sparsely inhabited neighborhoods should lose their water and the remaining tenants moved out. It is downtown and midtown that are top on the water department’s list for repair.
According to the Moody’s report the city is beset by high debt and pension burden with a citywide population declining and per-capita income just above 52 percent of the nation’s. Payment of this debt depends on increasing tax revenue, they assert.
It is not the wealthy that Moody’s expect will pay. Billionaire owners of entertainment venues and real estate have extorted huge tax abatements. The billionaire Illitch family got $325 million for a new sports arena and $618 million went to billionaire Dan Gilbert for building projects in the city, including a new skyscraper. Ford is expected to ask for some $240 million in forgone tax payments for its investment in the once-abandoned train station in Detroit.
Meanwhile, hundreds of thousands in Detroit live in daily economic desperation in blighted neighborhoods, suffering from unemployment, low wages and little social support. According to the US Census Bureau, Detroit is still the poorest large city in America, with 40 percent of the population living below the woefully inadequate official US poverty line.
Despite having land and house prices relatively low in comparison to “superstar” cities like New York and Los Angeles, Detroit and its larger metro area is experiencing an epic housing crisis that has left neighborhoods across the city resembling a war zone. Abandoned, burned and demolished homes line block after block.
Once the US city with the largest percentage of home ownership, now over half of Detroit consists of rental households. Hundreds of thousands of families live in what the industry calls “scattered site” housing, that is, single-family homes. They were once owner-occupied but now have been gobbled up by landlords, many who own properties in the hundreds or more.
Tax auctions churn this real estate. Absentee landlords regularly buy sub-standard homes at tax auction, neglect needed repairs, then dispose of them back to tax foreclosure when they become utterly unfit for habitation.
An estimated 4,300 households currently squat in homes actually owned by the Detroit Land Bank, people who are effectively homeless. A brief window, now closed, was open this summer to offer a relief program to a small number of residents who had experienced tax foreclosure. But they had to come up with $1,000 and maintain a payment plan. That sum was out of reach for impoverished residents.
Wayne County, which includes Detroit and many of its inner suburbs, has foreclosed on over 160,000 properties since 2002 in its annual tax auctions. The county counts on millions in revenue from foreclosures. They got $64 million in 2014 alone based on foreclosures and the huge fees and fines tacked on arrears.
Poverty and low wages drive the housing crisis. The policies of the Democrats in the city and county drive the poor out. Houses are torn down, not fixed, to create a shortage that will force the market to raise home prices and increase tax revenue. In the past 15 years one in three properties in Detroit has undergone tax foreclosure.
This is the state of affairs in Detroit five years after the bankruptcy. The result has not been a revival of the city but a vast expansion of the social divide between rich and poor, with workers being bled to feed the profits of banks and real estate developers.
The experience of Detroit demonstrates the 
utter inability of the capitalist profit system to 
address the most basic social concerns. It 
exposes all the fraudulent claims of various 
pseudo left organizations that workers could 
defend their interests through pressuring the 
trade unions or the Democratic Party. It raises
in the sharpest manner the necessity for 
workers to adopt a socialist strategy aimed at 
ending the subordination of society to the 
profit demands of the banks and Wall Street.


Trade and recession fears hit Wall Street

By Nick Beams 
5 December 2018
Wall Street plunged on Tuesday, with the Dow falling by 800 points and all major indexes down significantly, as the purported trade deal between US President Trump and China’s President Xi Jinping, announced on Saturday night, began to unravel.
However, the fear that nothing has been resolved in the trade war was by no means the only factor in the market sell-off, which followed a surge on Monday. A major issue was growing concern that the US could be entering a recession with yields on bonds falling, an indication that investors are seeking a “safe haven.”
The growing negative sentiment over the outlook for the US economy was seen in a flattening of the yield curve—the difference between the interest rate on shorter and longer-term bonds. At one point, the difference between the yield on two-year and ten-year bonds was under 10 basis points, its lowest level for 11 years. A flattening yield curve is widely regarded as indicative of a recession.
The market slide went across the board with companies that are dependent on global markets, such as Caterpillar and Boeing incurring losses of 6.9 percent and 4.9 percent respectively. High-tech stocks sensitive to trade war fears, also fell, with Apple down 4.9 percent. The tech-heavy NASDAQ index dropped 3.8 per cent and is now more than 10 percent below its August high.
The S&P 500 index dropped by 3.2 percent and fell below its 200-day moving average, a key indicator of the market trend. Bank stocks were also down as, in the words of the Wall Street Journal, “investors’ worries of a recession and the strength of the economy grew.” An index of bank shares fell nearly 5 percent.
The doubts over the possibility of any agreement with China started from the top with tweets by Trump indicating he doubted whether anything had been achieved. He said his economic team would be “seeing whether or not a REAL deal with China is actually possible” before the deadline on negotiations expires on March 1.
“If it is, we will get it done … if not, remember, I am a tariff man,” he wrote.

According to the US report of the talks, China agreed to talks on so-called “structural” changes in its economy in response to Washington’s claim that it is engaging in the theft of intellectual property (IP) and using forced technology transfers to enhance is technological and industrial base. Failure to reach an agreement on this issue would see the US lift the tariff rate imposed on $200 billion worth of Chinese goods from 10 percent to 25 percent.
But there has been no acknowledgement by China on whether negotiations on this key US demand has been agreed to. As the Financial Times commented, the claims by Washington have either not been supported by the Chinese side or are mired in confusion.
“Not only did this cast doubt on whether the two sides would be able to reach a comprehensive deal within the next three months, it raised the possibility of a collapse even before then,” it stated.
Throughout yesterday, doubts were cast over the purported deal as the contrast between what the US said and the Chinese version of events became more apparent. In the wake of the meeting with Xi, Trump claimed that China had agreed to cut tariffs on US cars, but this was not mentioned in the statements from either side.
White House economic adviser Larry Kudlow insisted on Monday that such an agreement had been reached. However, he was then forced to back away yesterday saying while Washington did not have a “specific agreement,” the tariff reduction was highly likely.
Kudlow was also corrected by the White House after saying that the 90-day deadline would start in January. The starting date is December 1.
The changing story on car tariffs, while important in itself, has broader significance as it casts doubt on what was actually agreed.
Agriculture is another area where the situation is, to say the least, unclear. The US said that there would be a “very substantial” increase in exports, but this was not reflected in Chinese statements on the talks.
Amid the confusion and conflicting accounts of what was and was not agreed in Saturday night’s meeting between Trump and Xi, the key issue remains the Chinese program of industrial and technological development under its “Made in China 2025” plan.
In a comment published in the Financial Times on Monday, former IMF economist and Bank of India governor Raghuram Rajan noted that the issues dividing the US and China go far beyond the question of trade. The strongest indication of the extent of the conflict was the speech by US Vice President Mike Pence in October “where he all but declared a new cold war.”
Rajan, one of the very few economists to warn of a financial bubble prior to 2008, said while it was “reasonable” for China to bring its intellectual property practices “in line with western norms,” the Chinese fear this is “not the ultimate US aim.”
“They believe that even if they comply, the US will not allow a significant presence in frontier industries including robotics, artificial intelligence and semi-conductors. That, to the Chinese smacks of a ceiling on development. It is simply non-negotiable.”
Rajan warned that simply piling tariffs on tariffs would lead to China becoming a country under siege, “precipitating a cold, even hot, war.”
He called for major powers to come together to negotiate changes in China’s IP practices. “But the quid pro quo has to be to recognise that the world is multi-polar, that China should have more power and responsibility in global institutions” and that a sensible deal “will require compromise on both sides,” he wrote.
However, the major obstacle for this would-be rational scenario is that the conflict is not governed by the laws of reason but by material economic and geo-political interests. The US is not prepared either to recognise the need for a “multi-polar world” or to make concessions to China’s increased economic power. Washington fears this will undermine its global economic and military dominance, which it is determined to maintain at all costs and by whatever means necessary.



This determination will assume even more belligerent forms under conditions of a significant downturn in the US economy or the development of a recession, the signs of which are growing.

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