S&P Downgrade May Pummel State and Municipal Bond Ratings

Tuesday, 09 Aug 2011 12:05 AM

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The fallout from Standard and Poor's decision to strip the U.S. of its AAA debt rating could damage ratings held by state and local government across the country, experts say.

Many states and local governments depend on the federal government for economic support, and could see a financial squeeze.
Moody's, for example, has put five of its 15 AAA-rated states, including Maryland and Virginia, on credit watch for a possible downgrade, USA Today reports.

Many local economies are heavily dependent on federal spending, and with Congress and the White House are under more pressure now to cut spending in wake of the downgrade, that could mean an end to those coveted ratings.

"Hundreds of cities and counties are going to lose their AAA ratings because they have economies that rely on the federal government," says Mike Bell, a Georgia State University professor who was previously chief financial officer of DeKalb County, Ga., USA Today reports.

Standard & Poor’s has already begun cutting ratings on very local municipal bonds tied to the federal government, including housing securities and debt-backed by leases.

"It’s expected, but nobody is happy about it,” Bud Byrnes, chief executive officer of Encino, California-based RH Investment, tells Bloomberg.

"No one that I know thinks it was justified to cut the U.S. bonds to AA+. Once that happened, you knew that any pre-refunded bonds or escrowed bonds would be downgraded too. It’s a domino effect."

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