Ratings services downgrade city's status after Kevyn Orr asks creditors to take around 10 cents in the dollar

The "insolvent" city of Detroit will default on some of its $18.5bn debt and has asked creditors to accept a fraction of money owed to them, in an attempt to stave off the largest municipal bankruptcy in US history.

In a plan unveiled on Friday by the city's emergency manager, Kevyn Orr, creditors were asked to take around 10 cents in the dollar, a move that will kick-start negotiations. Orr also announced that the city would stop making certain payments in order to save money. A $34m instalment on debt due to be issued on Friday was stopped as part of the plan. Orr said the moratorium on payments could save Detroit up to $25m every month – money that could go towards essential services.

Orr said that $1.25bn would be invested over the next decade to improve infrastructure, fix crumbling buildings and update the city's computer systems.

Two ratings services, Fitch and Standard and Poor's, reacted by downgrading Detroit's status to a level reserved for borrowers about to default.

Some creditors emerged from meetings with Orr complaining that he was expecting too much. One bond-holder told Reuters: "It is an unprecedented amount to ask." But Orr insisted that shared sacrifice was needed if the "insolvent" city was to rebound from financial crisis.

Detroit is amongst the poorest large cities in the US, with the highest rate of violent crime. A population decline of around 700,000 has contributed to its problems, resulting in a slump in tax revenue and the blight of deserted properties.

In a statement, Orr said: "Financial mismanagement, a shrinking population, a dwindling tax base and other factors over the past 45 years have brought Detroit to the brink of financial and operational ruin." He added that the city was "tapped out" and that creditors needed to shoulder the sacrifice.

The financial plan is aimed at helping Detroit avoid filing for Chapter 9 municipal bankruptcy. Whether the city is able to do so will largely depend on the course of negotiations between the emergency manager, creditors and labour leaders in the coming weeks.

Orr, a bankruptcy attorney brought in by the state of Michigan, said on Friday that he believed the odds remained at 50/50, regarding whether the city would have to file for bankruptcy.