DETROIT, Michigan (AFP) - Detroit will be a great city again once the birthplace of the US auto industry gets a fresh start with a bankruptcy filing, Michigan's governor said on Friday.

Saddled with more than US$18 billion (S$23 billion) in debt and a shrunken tax base, the Motor City has been so strapped for cash it cannot even keep the streetlights on.

"Now is the opportunity to stop 60 years of decline," Governor Rick Snyder said at a press conference a day after approving the biggest municipal bankruptcy in US history.

"We will come out with a stronger, better Detroit and a format to grow this city. The citizens of not just this city but the state deserve it."

Once a bustling beacon of industrial might, the city is now a poster child for urban decay, its landscape littered with abandoned skyscrapers, factories and homes.

Detroit has seen its population shrink by more than half - from 1.8 million in 1950 to 685,000 today - as crime, flight to the suburbs and the hollowing out of the auto industry ate away at its foundations.

The bankruptcy is expected to make it harder for municipalities in Michigan and other US states to borrow money by undermining confidence in what used to be among the most trusted bonds available.

It is being closely monitored by government workers across the country who are fearful that they too may see their retirement benefits slashed.

About nine billion dollars of the city's debt is owed to the pension funds and retiree health care benefits of the city's 10,000 workers and 20,000 retirees.

While pension benefits are protected by the state's constitution, the bankruptcy process could drastically diminish those obligations.

State-appointed emergency manager Kevyn Orr said the city has about two billion dollars to repay US$12 billion in "unsecured" debt, which includes the pension obligations.

"Yes, there are 10,000 employees. Yes, there are 20,000 retirees. But there are 700,000 citizens who don't deserve 58 minute (police) response times," Orr told reporters.