Wednesday, April 08, 2009

Muni bonds face downgrade

Sounds like Moody's is tired of being the poster child for missing the housing bubble. I think they want to make sure they aware of any seismic shifts in the economy and putting every local government in the US on creditwatch is one way to stay in front of the curve.

"Moody’s Investors Service assigned a negative outlook to the creditworthiness of all local governments in the United States, the agency said Tuesday, the first time it had 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.

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 a special report made public on Tuesday, the agency cited revenues that are falling almost everywhere as a result of the economic downturn. But it also discussed the problems some municipalities had created for themselves by using complex financial products that seemed to be saving money at first, only to send costs soaring during the credit crisis.

In former boom states like California and Florida, the sharp decline in housing prices is translating into falling property-tax revenue, while in towns in Michigan, Indiana and Ohio, revenues are off because of the collapse of the auto industry. Many local governments in New York, New Jersey and Connecticut will lose significant revenue because they rely on the banking and financial services sectors for their tax bases. Moody’s said any municipality relying heavily on tourism, gambling or manufacturing was probably at risk of feeling a pinch.

(Since many of my readers are in Upstate NY - Think about how many factors are waying on NY - falling housing prices downstate, industries leaving upstate, Wall Street's problems lead to lower tax revenues, etc, etc. It's not a pretty picture for NYS).

“Taxpayers, worried about their own financial condition, are more resistant than ever to increasing property or other local taxes,” the report observed.

Fed Chairman Bernanke suggested that instead, Congress could consider setting up some other form of assistance for municipalities unable to restructure or refinance their debt, like a federal bond reinsurance program."

A few months ago I suggested that we've become a Bailout Nation and watch for bailouts coming for life insurance (check), housing (check), credit card companies (not yet) and even local municipalities (not yet, but Chairman Bernanke seemed to be suggesting a bailout for municipalities).

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