European Banks Feeling The Effects of Detroit Bankruptcy

Detroit is not the only place affected by its current bankruptcy filings.

According to The Detroit News, several European banks are on pace to lose millions of dollars

Banks in Germany, Belgium and Luxembourg are among those that purchased the city of Detroit's debt. The institutions are now standing to lose up to hundreds of millions of dollars as a result.

There has been an average of 4.6 municipal defaults per year since the 2008 financial crisis. This is over triple the annual average over the previous three decades. The banks saw taking on municipal debt as a risk-free endeavor, as many of the recent municipalities bankruptcies ended up repaying their debt.

Peter Henning, a Wayne State University professor and former Securities and Exchange Commission attorney, told The Detroit News that foreign banks “interpreted the city debt as sovereign debt — to mean it will never default.

"In fairness to them, this isn't Argentina. They were more trusting. The big question is whether Detroit is an outlier or a harbinger of future losses for the banks.”

The French-Belgian Dexia SA DXBGF has up to $305 million in exposure to Detroit's debt. In Germany, Commerzbank CRZBF and its affiliates may have, according to Reuters, loaned the city as much as $400 million. According to a bankruptcy filing, EEPK out of Luxembourg holds notes worth over $152 million.

Detroit Emergency Manager Kevyn Orr has proposed paying UBS AG UBS and Bank Of America BAC about $250 million to terminate an interest rate swap agreement dating back to 2006. This would help free up $15 million in monthly casino revenue that the banks control access to.

As Detroiters have seen with the Orr's handling of city pension funds, among other financial worries, this is not always so easy. Some of the European banks oppose to deal as they want their claims evaluated first, while also having the option to sue UBS.