Around the world, the dominoes of debt are teetering, and one of the biggest to hit the ground may be the City of Stockton.

Stockton, CA Leads Nation In Rate Of Foreclosures — The City of Stockton would be the largest city yet to go bankrupt. (Justin Sullivan/Getty Images)

The city is hoping against hope that mediation with its bondholders, now underway, will result in a new deal by Monday. There's scant room for maneuver after that date because the city must produce a balanced budget by July 1.

Without a deal, the city will likely plunge into bankruptcy, according to Stockton Record city hall reporter Scott Smith. It would be the largest city in the US to go belly up.

The following is an edited version of an interview that The California Report’s Rachael Myrow’s conducted with Smith:

RACHAEL MYROW: How did Stockton get into trouble?

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SCOTT SMITH: The city basically overextended itself in debt back prior to the Great Recession, which began in 2008. It built a lot of capital projects. There’s a downtown waterfront ballpark sports complex, an arena. They built a marina. The city also negotiated generous benefits and employee packages with city employees, and also created back in the 90’s a retirement healthcare package for its employees which it never really funded.

RACHAEL MYROW: So I know the mediation talks are supposed to be secret, but do we have any idea how they’re going?

SCOTT SMITH: It’s an informal process now for the last three months, and so there’s no real hammer to make people make any deals. The sense is that if the bond holders were to take a haircut, to take a cut on their investment, that’s going to set a bad precedent. Other cities in California in similar, dire situations are going to follow suit. So the sense is that no one’s going to budge, it looks very likely that bankruptcy is going to be in Stockton’s near future.

RACHAEL MYROW: Talk a bit more about that bankruptcy contingency plan. The Stockton officials have posted it online for people to see What are the key elements of it?

SCOTT SMITH: The city is facing a $26 million deficit to its general funds, come July 1st. Basically they chip away at that. They say, “Okay, we’re going to spend about $12 million in bond payments on some of those projects, and some of those obligations.” To some of the litigants that have filed lawsuits against the city, they say, “Okay, we’re not going to pay that.” And they’re also making some reductions to what the city pays to retirees and their healthcare.

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Stockton Wobbles Toward Bankruptcy