Moody’s would downgrade states, cities if US hits debt limit
July 15th, 2011 at 10:18 am by Ted Nesi under Nesi's Notes
With less than three weeks to go before the deadline for raising the federal debt limit, the rating agencies are issuing increasingly gloomy reports about what will happen if Washington fails to reach an agreement.
And now Moody’s is warning that the federal government won’t be the only entity affected, Bloomberg reports:
At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.
An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action. …
It didn’t provide a total value for other state and local credits that may be affected, including housing authorities and nonprofits. …
Issuers that are partially dependent on the federal government, such as states receiving Medicaid matching funds, also will be reviewed for vulnerability.
Rhode Island isn’t rated Aaa by Moody’s, so it’s not clear to me whether the state’s rating would be lowered in the event of a U.S. downgrade. The quasi-public agencies could be affected – the Rhode Island Clean Water Finance Agency is rated Aaa, for example.
No city or town in Rhode Island was rated Aaa as of March 17, according to a Treasurer Raimondo’s office. The municipalities with the best ratings were Barrington, Middletown and South Kingstown, all rated Aa1 (one notch below Aaa).
On a brighter note, Dow Jones Newswires reported earlier this week that the bond market has shown no signs of concern in response to the latest reports of financial distress in Central Falls and elsewhere here:
So far, no significant trades have taken place in any Rhode Island debt, both from the state itself as well as its cities and towns, said Dan Berger, senior market strategist at Thomson Reuters Municipal Market Data. …
The state’s 10-year debt trades at yields around 3.17%, 47 basis points above triple-A rated state debt, Berger said. The latest trading levels are little changed from the state’s year-average spread of 46.1 basis points. The state has the ninth largest spread of all states tracked by MMD.
Rhode Island bonds haven’t moved much because there’s very little debt outstanding, both on a state and local level. Fewer bonds usually means less trading, and therefore less volatility in prices.
Rhode Island has about $2 billion of tax-supported debt outstanding, according to MMD data, a pittance compared to California’s roughly $90 billion in general obligation bonds and New York’s approximately $60 billion in debt.
(photo: CoinCircuit.com)
Tags: bonds, credit ratings, debt, debt limit, moody's
Nesi's Notes covers politics and the economy in and around Rhode Island for WPRI.com. (Twitter: 
Ted:
The Intermodal Train Station bond is in a precarious position. RIAC FY 2012 budget shows a $2 million plus loss for this facility including depreciation. One has to look at the funding for MBTA operations for this station and for Wickford. I can’t find a specific line in the state budget dedicated to provide this commuter service.
The Public Rail Corporation has yet to hold an annual meeting. It should come up in a couple of weeks. This state entity falls under Sarbanes Oxley as does RIAC.
The current bond ratings for the Intermodal are shaky. It is at a risk to go below investment grade. That could cause serious problems for RIAC and the EDC. Public Rail Corporation needs to meet to discuss this situation.
[...] Moody’s warns of 7,000 downgrades if the federal debt-limit fight doesn’t get [...]
Frankly, to the extent that the downgrade would be a result of the loss of the implicit guarantee of a Federal bailout, I’d consider it to be a good thing. Like Fannie & Freddie, these securities are being traded based on borrowed safety, and the Feds are called in later to retroactively make good on the lies. If the only cost of the Federal debt limit problem were that state and municipal bonds started to be honestly rated, we would all be better off.
It is time to fish or cut bait. Better to default than continue to add irresponsible debt. The nation cannot afford to carry the debt burden urged by Obama. Nor can we increase taxes without losing more of the industrial base and jobs. The only rational course is to cut the size and scope of the federal budget, welfare, food stamps, medicare, social security. Like every socialist endeavor before or since Roosevelt/Democratic socialism is a bust and came to a dead end dead stop here and now.