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Major Southern City on Verge of Bankruptcy


By Pat Shannon

Birmingham, Ala. is discussing filing for bankruptcy after struggling to pay the interest on more than $3 billion of debt, the London Daily Telegraph has reported. Jefferson County, which contains the city, borrowed billions of dollars via complicated financial instruments devised by Wall Street investment banks in recent years. The city, which is home to more than 650,000 people, is set to become one of the biggest victims yet of the global credit crisis.

There are growing fears that the threat of bankruptcy from the credit crisis could now spread to public bodies and governments around the world. Investment banks targeted local authorities across America with complicated finance schemes—many of which are now unraveling—over the past few years.

In Europe, Iceland is already facing potential bankruptcy and is likely to receive emergency funding from the International Monetary Fund. Several eastern European countries and Pakistan are also facing serious economic trouble tied to the reckless behavior of global moneylenders.

Concern has also been raised over the economic position of the Italian government with some experts predicting it may fail to make interest payments on its debt. Britain is to borrow tens of billions to finance Gordon Brown’s banking bailout and may have limited scope to fund rescue packages for other industries if this becomes necessary.


Birmingham ran into difficulty after borrowing $3.2 billion to fund a new sewage system in the late 1990s. It then refinanced this debt using sophisticated financial schemes. Allegations of corruption and wasteful spending

involving the deal are being investigated. The credit crisis means that the county is now unable to refinance the debt again at an affordable level.

Sewage rates have already quadrupled but the local authority is unable to pay its interest repayments on the debt. Retail sales taxes are now at 10 percent in Alabama’s major cities of Birmingham and Montgomery, and last year Birmingham doubled its cost of business licenses.

Local officials decided not to apply for bankruptcy protection immediately. However, it may be put to a referendum of local voters next month. President Bush and other senior Washington officials have also been involved in rescue talks.

If Birmingham goes bankrupt it will be one of the biggest public sector collapses in more than 20 years. New York narrowly avoided going bankrupt in the 1970s and took more than a decade to recover. A decade ago, Orange County, Calif. was on the ropes and attempted to postpone its debts with bills of credit but was stopped by a constitutional mandate in Article One, Section 10.

Birmingham was regarded as a vital industrial center in America until the 1970s. Although it suffered from a sharp economic downturn, was until just recently a thriving city with big healthcare and banking industries.

It has relatively low unemployment but local residents are likely to face very steep tax increases as a result of the financial turmoil. It’s a predicament that is being closely followed by other local authorities in America and around the world.

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(Issue # 47, November 24, 2008)

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