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Detroit Files Bankruptcy, Coincides with U.S. Credit Upgrade (Update 1)

Updated from 5:23 p.m. ET with commentary and analysis throughout.

NEW YORK ( TheStreet) - Detroit, once the nation's fourth-largest city, has filed for a Chapter 9 bankruptcy after out-of-court restructuring efforts failed on Thursday.

Detroit's filing is the largest municipal bankruptcy in U.S. history and comes just four years after the bankruptcy of some of the city's biggest employers; automakers General Motors and Chrysler. While GM and Chrysler have emerged from bankruptcy stronger than ever and are part of a burgeoning economic recovery in the U.S., Detroit's finances have continued to deteriorate.

Once the saying was "as goes Detroit so goes the nation." Thursday afternoon, as Detroit's filing hit newswires, ratings agency Moody's upgraded its outlook on the credit rating of the United States, a sign of changing times for the city.

Kevyn D. Orr, the emergency manager appointed by Michigan governor Rick Snyder, estimated Detroit may have debts of between $18 billion and $20 billion. Both Orr and Snyder approved the bankruptcy filing, which was made in a U.S. Bankruptcy Court in the Eastern District of Michigan.

"Detroit's broke," Snyder said in a video posted on YouTube. The governor characterized bankruptcy as a 'fresh start' that will allow the city to restructure its debt load and legacy costs, while working to improve services for its residents.

Orr, the city's emergency manager, has forecast that a restructuring could help the city spend about $1.25 billion in restarting critical services and rebuilding fallow infrastructure.

"[Detroit] has a lot to do and not a lot to work with," Paul Maco, a partner in the public finance group at Bracewell & Giuliani said in an interview. Maco, who worked with the Orange County, California bankruptcy as a director of the SEC's Office of Municipal Securities, said Detroit's Chapter 9 could take as long as several years.

"What this does is give the city its breathing room," Maco said, while noting that it's unclear what role, if any, the state of Michigan will play in helping the city.

Some key issues precipitating the filing and which will be sorted out in courts are the city's $9.2 billion in unfunded pension and retiree health care liabilities. Meanwhile, Detroit will need to work to gain financing to maintain services to the city's 700,000 residents, as it negotiates with creditors.

Previously, the 2011 bankruptcy of Jefferson County, Alabama was the largest in U.S. history. If Detroit's bankruptcy process drags on for many months or years it would contrast with the quick and federally-assisted exits that GM and Chrysler had in 2009.

"It is clear that the financial emergency in Detroit cannot be successfully addressed outside of such a filing, and it is the only reasonable alternative that is available," Snyder said in the letter granting his state-required approval.

-- Written by Antoine Gara in New York

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