Jefferson County bankruptcy gives municipal bond market jitters

Alabama's Jefferson County, covering the state's largest city of Birmingham, has become the largest municipal bankruptcy in US history after failing to break free of debts incurred in the rebuilding of its sewer system.

The $3.14 bn (£1.98bn) bankruptcy, the most significant since Orange County of California went bust in 1994, came after more than three years of financial struggle and allegations of widespread corruption, and it threw the spotlight once again on the difficulties facing local authorities across the US in a time of austerity.

County commissioners voted for a bankruptcy filing after the collapse of a putative refinancing deal agreed under pressure from the state Governor, Robert Bentley, in September. He said he feared the filing would send interest rates higher on other municipal debt from the state.

Jefferson's collapse into bankruptcy is the legacy of controversial bond swap deals almost a decade ago, which led to dramatically increased interest payments and threatened to send sewer charges for residents much higher. Several county officials were convicted of corruption over the use of these derivatives, and JPMorgan Chase, the bank, paid $722m to settle claims that it had paid bribes to win the financing business.

As the county's largest creditor, JPMorgan Chase said it had offered substantial concessions to try to avoid bankruptcy: "We will continue to work toward a fair and reasonable solution for the county and all creditor constituents involved." Brokers in the $3tn municipal bond market, which is popular with small investors in the US because of its tax-exempt status and the perceived low risk of default, raced to insist that Jefferson's collapse was the result of factors unique to that county.

None the less, municipalities across the US have borne the brunt of the recession and sluggish recovery, with tax receipts down and aid from state government also under pressure.