Banks could demand payment from the US city of Chicago against letters of credit (L/Cs) if it continues its fiscal free fall.

Soaring pension payments, tough negotiations with labour unions and threatened state funding cuts are some of the challenges facing the city.

Ratings downgrade

Moody's recently downgraded Chicago's rating to Baa2, just two steps above junk, and issued a warning its rating could fall further still.

According to the ratings agency, if Chicago's rating falls below Baa3, it could be forced to pay about US$1.2 billion if banks that provide liquidity facilities such as L/Cs for city debt demand immediate collateral.

Fiscal problems

Amongst Chicago's fiscal problems, the city's total bond debt was US$21.4 billion at the end of 2014 while pensions are its biggest liability.

It ended its 2013 financial year with an unfunded pension liability of US$19.2 billion in its four retirement funds, leaving them just 37 per cent funded.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.