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Wednesday, 11 January 2012

Bankrupt US municipality cuts pensions, saves financial institutions

Retired municipal employees in Central Falls, Rhode Island will have their pensions cut, as investors in US municipal bonds are spared a haircut, according to "Pensions chopped but investors paid".  The parallel with Greek default prevention raises questions.

Q1.  Is Central Falls debt insured?

Q2.  Why do retirees and pensioners suffer a "haircut" loss, and not bondholder investors who are paid income for knowingly taking that investment risk?

Q3.  Has pressure been applied behind the scenes to avoid municipal default at the cost of pensioners?

Q4.  What would be the consequences for bond insurers if a bond insurance pay-out were triggered?

Some pensions in Central Falls have been cut to $12,000 a year from about $27,000 a year, according the article.  Many US municipalities are on the verge of bankruptcy, according to Meredith Whitney.  Pensioner reaction may well contribute to escalating US social unrest.

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