The bankruptcy of the city of Detroit was the largest municipal bankruptcy in history. But recently, Moody's downgraded the municipal debt of the city of Chicago, raising fears that the Windy City could become the next problem spot. Will Chicago be the next Detroit?
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the Moody's downgrade of Chicago's debt, noting that a pension crisis will require the city to contribute more than $1 billion to shore up pension fund balances. Moody's argues that such large contributions raise questions about the long-term solvency of the city, with the fear being that a downward spiral of declining city services and rising taxes could make Chicago suffer what Detroit has already gone through. Yet Dan points to bond-analyst beliefs that Chicago isn't in the same situation as Detroit. Detroit's economy was highly dependent for decades on Ford (NYSE:F), General Motors (NYSE:GM), and the rest of the auto industry, while Chicago has a more diversified economy. Nevertheless, investors need to keep their eyes on the situation to make sure that the situation doesn't deteriorate further and put their money at risk.