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Detroit woes complicate Michigan city, town borrowing: governor

By Nick Carey

DETROIT (Reuters) - Detroit's bankruptcy filing has made it harder for Michigan's municipalities to tap America's municipal bond market but it is difficult to say exactly how much impact it has had, the state's governor said in an interview Tuesday.

"I think it's probably made it more challenging but it's difficult to say what degree you would put on that," Republican Governor Rick Snyder told Reuters in a phone interview while on a trip to China to promote investment and tourism in Michigan. "But the whole thing is it's hard to tell because there are a number of issues in the debt markets these days. It's becoming more challenging. Period."

Facing some $18.5 billion in long-term debt, Detroit filed for bankruptcy on July 18. If the federal judge presiding over the case allows the bankruptcy to proceed it would be the largest Chapter 9 municipal bankruptcy case in U.S. history.

Kevyn Orr, the state-appointed emergency manager overseeing the city's finances, has offered creditors pennies on the dollar and the bankruptcy case is expected to be costly and protracted.

Since the filing in July, some in America's $3.7 trillion municipal bond market have been wary of debt coming out of Michigan.

Some local Michigan issuers have delayed planned debt sales because of a spike in yields since, which has spooked some retail buyers.

In August, investors demanded and obtained a very high interest rate on $92 million debt issued by Detroit's school system.

"We haven't had major pushback (from Michigan municipalities on problems with debt issuance), we've had calls giving us updates on how their financings are going," Snyder said. "But I would say that it's something that we're watching and having discussions with people on."

Earlier on Tuesday, the governor agreed to give a deposition to creditors' lawyers ahead of the pending bankruptcy case, after the attorney general's office had argued on his behalf against the move citing executive privilege.

Public sector unions in particular have maintained that Snyder and Orr colluded to push Detroit into bankruptcy in order to strip city workers of benefits and pay, which are protected by Michigan's constitution.

"We're just following through with the legal process and make sure we're focused on turning Michigan around in terms of getting better services to citizens," Snyder said. "We had a lot of discussions and in the end we made a voluntary decision to do the deposition."

Snyder also said that despite Detroit's dire financial situation, there would be no massive injection of state aid to resolve its problems.

"I've been very consistent on that and the state is not going to bail out Detroit," he said. "Nor would I recommend the federal government bail out Detroit with respect to the debt situation."

"We have done a lot and will continue to do a lot to help enhance the quality of services for Detroit because I think that has lasting value," he added.

The governor has frequently run into opposition from conservatives within his own party, especially on the implementation of parts of Democratic U.S. President Barack Obama's signature health care reform.

Conservatives blocked a state health care exchange designed to allow uninsured Michigan residents to sign up for government-subsidized health insurance as part of "Obamacare." Instead, a federally run exchange for Michigan will take effect on Oct 1.

"My continuing view is we could have done a better job at the state level," Snyder said. "But I'll leave it up to the federal government to effectively implement what they said they were going to do."

The governor added that he would have preferred to borrow from the experience of travel web sites Expedia and Orbitz to set up a state-level exchange.

"That would be more user friendly and borrowing from the private sector things that work because most of us buy our tickets that way when we travel," he said.

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