The International Origins of the 1975 New York City Fiscal Crisis

International markets, and global recession of the mid-seventies, contributed to New York's fiscal crisis.  Specifically, the municipal bond market failed to provide for the financial needs of cities and states in the US.  This happened in part through ending Kennedy era legislation, the Interest Equalization Tax, that hindered European and Latin American bonds from being sold in US markets.  When that legislation was removed in 1973, the municipal bond market was flooded with literally double the dollar value of bonds in a single year.  In 1975 both Mexico and Montreal entered U.S. credit markets, joining a host oil producing, and European countries.  Together, they brought the estimated total for foreign offerings in U.S. markets up by $1 billion, to $3.1 billion, “matching the total annual supply as recently as 1973,” according to  Salomon Brothers.[1](And also beginning the process of foreign debt speculation that would collapse spectacularly in the 1982 Mexican debt crisis.) The flooded market from Euro sellers, and other factors like the unprecedented rates of inflation, led the municipal market to become what Merrill Lynch president Don Regan called "a bloodbath." When NY couldn't sell its notes in the market, or when banks refuse to underwrite and buy them, the "crisis" began for the city. 

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[1] Salomon Brothers paraphrased in Lindley B. Richert, “Ovverings of Foreign Debt in U.S. Surge,” Wall Street Journal, Feb. 18, 1975. Interestingly, there were also elements of anti-semitism in the sale: “Inclusion of Jewish-controlled Lazard as a participant in the Mexico offering reportedly brought on serious strife within the group sponsoring that issue, sources said. The Kuwait International Investment Co., a financial house half-owned by the Kuwait government, withdrew last week as a managing underwriter.”

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