What happens if a City Council goes bankrupt?

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Forums › Finance and wealth management › What happens if a City Council goes bankrupt?

Batman

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#195969 13-May-2016 22:22

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http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11638732

Apparently Auckland City COuncil is $7.5 billion in debt ...

Why is that body unable to make money, only knows how to spend? Surely!

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ockel

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#1552512 14-May-2016 08:25

joker97:

I don't understand why a city council needs to be in debt whether it's $1 or 10 billion?

You can tell I am not a businessman ...

The debt for a council is generally used for capital works. Rather than paying for key projects out of rates (and never raising enough money to undertake the projects) councils generally borrow and then use the rates to pay the interest.

Laughably if there is a one-notch downgrade in the council debt (because its debt-to-income exceeds 2.7x) it'd result in an $11m increase in interest - on $7.5bn in debt. Thats a huge 0.14% increase in interest rates.

The council is rated AA and Aa2 which is well above investment grade. Its higher than any of NZ's trading banks (all AA-).

The council has about $40bn in assets - so its debt makes up less than 20% of its total assets. Plenty of headroom to borrow more and achieve an efficient capital structure. Its better to use someone elses money to grow your assets than your own - hence the use of borrowed money to increase property wealth in the NZ market.

Personally I'd like to see the council borrow more money, buy land, build houses and lease them to first-home buyers or for social housing. Its got plenty of scope to be a landlord in its own region.

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