Moody’s assigned a negative outlook to the creditworthiness of all local governments in the United States, the first time the agency has ever issued such a blanket report on municipalities.
[...]The report signaled how severely the economic downturn was affecting towns, counties and school districts across the nation.
While Moody’s regularly reports on the financial strength of various sectors of private industry, its analysts have in the past considered America’s tens of thousands of towns and local authorities too diverse for generalizations.
The report suggests that the ratings of many governments could be downgraded in the coming months, something that would make it more expensive for them to borrow money to finance their operations.
In the most extreme cases, municipalities might default on some of their obligations, as Jefferson County, Ala., has been threatening to do for a number of months.
Vallejo, Calif., declared bankruptcy last year and is being closely watched to see if it will set a legal precedent that other towns could follow.
Moody’s did not report on individual cities or towns, but its overview offered a general note of caution for investors who have bought municipal bonds seeking a safe stream of income in difficult financial markets.[...]
[...]The report’s publication coincided with the downgrading by Moody’s of the credit of the State of Illinois to the A level from double-A. Moody’s said Illinois was having difficulty managing its cash, and in recent weeks had been trying to push its scheduled pension contributions into the future. The state pension fund is already seriously underfunded.[...]
[...]The Federal Reserve chairman, Ben S. Bernanke, warned that local governments had probably lost their ability to lower their borrowing costs by linking their bonds to derivatives. Such bond packages had become popular in the last few years because they appeared to offer cities both the lower borrowing costs of variable-rate bonds and the predictability of fixed-rate bonds. But the structures broke down during last year’s market turmoil, leaving some municipalities staggering under more debt than they can afford.[...]
Source: New York Times
Attention: Be on the lookout for the ‘bailout train‘ to arrive at a town near you (or your own town) soon.
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