July 26 (Reuters) - Detroit's filing for bankruptcy protection is "profoundly meaningful" for the small number of local governments in the United States that are below investment grade, and could change their approach to pensions and other long-term liabilities, Moody's Investors Service said on Friday.
Some distressed local governments could even find bankruptcy more appealing if Detroit can use its Chapter 9 case to slash pension benefits or general obligation debt, Moody's said.
But drawn-out, costly litigation could also deter other cash-strapped cities from filing, said Moody's Managing Director for Public Sector Ratings Anne Van Praagh.
"If Detroit is bogged down in years of expensive proceedings and fails to restore solvency or materially restructure its liabilities, other distressed issuers would be unlikely to emulate Detroit's approach," Van Praagh said in a Moody's report.
Moody's rates the vast majority of U.S. cities and towns above Baa3 and does not expect them to be affected by Detroit's dire situation.
The credit rating agency has just 34 local governments at speculative grades.
There could be a "modest increase" in the number of those towns that choose to use tactics similar to Detroit's if the Michigan city succeeds in cutting accrued pension benefits and general obligation debt, Moody's said.
In particular, if Detroit emergency manager Kevyn Orr is able to treat GO debt as unsecured, "the example could weaken GO claims relative to secured liabilities in other potential bankruptcy situations, and we could change the rank ordering of various debt security types including GO bonds," Moody's said.