Dear Editor, Birmingham City Council has for some years been considering funding some of its infrastructure projects with a municipal bond dubbed the “Brummie Bond”.
Ironically, Birmingham’s US namesake defaulted with a similar strategy just last November and is still struggling to refinance a major project. Further analysis shows that in both the US and China, the risk of default is increasing.
China: Municipal bond debt in China reached RMB12.09 trillion (25.6% of GDP) in 2011 and is forecast to hit RMB19.71 trillion by 2015. The ratio of local government debt to income reached 86% in 2010, but 20% of cities had a debt ratio of above 100%, making repayment impossible – at least theoretically.
US: “A growing number of US cities are choosing to fund essential services… over making payments on their outstanding debt – So far in 2012, there have been 21 municipal defaults totalling $978 million, versus 28 defaults totalling $522 million for the same period in 2011,” according to Bloomberg and Reuters news sources.
We wonder what makes the situation different in the UK.
Would investors in a Brummie Bond pay closer attention to the risks and the potential benefits?
The right ingredients for Birmingham’s financial independence need to be skilfully prepared at the right time: today’s financial situation may mean that the Brummie Bond is only part of a recipe for success.
Alexander Dippo Paris, Bassma El-Afghani, Kerry Qiu, John Wingfield-Hill, Ling Ling Wu.
Cambridge MBA students
