Now that the US ratings agencies are finally fulfilling their duties in downgrading sovererign debt and banking institutions around the world, it appears that the next focus on their dockets is the downgrading of state bond ratings.
On January 20th, Moody's downgraded both Illinois and Connecticut, and posted notice to everyone that they are beginning to accelerate their downgrading of municipal debt inside the US.
Though too few noticed, this month Moody’s downgraded Illinois state debt to A2 from A1, the lowest among the 50 states. That’s worse even than California. The state’s cost of borrowing for $800 million of new 10-year general obligation bonds rose to 3.1%—which is 110 basis points higher than the 2% on top-rated 10-year bonds of more financially secure states. – Wall Street Journal
One of the leading Wall Street credit rating agencies downgraded Connecticut's rating Friday, citing a heavily loaded state credit card, huge debts in pension and retiree health care programs, and a depleted emergency reserve.
The decision by Moody's Investors Service to lower state government's bond rating from Aa3 to Aa2, opens the door for Connecticut to pay higher interest charges on future capital projects, even though its rating remains relatively high.
Moody's cited "pension funded ratios that are among the lowest in the country and likely to remain well below average," referring to retirement programs that serve state employees and Connecticut's public school teachers. – The CT Mirror
Additionally, the state of Wisconsin was given warning by Moody's that they are now on watch, and could see a downgrade of their municipal debt very soon if changes are not made. Governor Scott Walker has attempted to address the fiscal irresponsibility of prior administrations, but is now under fire from the unions who control much of the government representation, to the detriment of the citizens of the state.
Yet Mr. Walker, who balanced the budget without new taxes, is the governor facing a union-financed attempt to recall him from office this year. If Wisconsin voters want to see where a state ends up without the kind of reforms that Mr. Walker made, they need only look to the Greece next door. – Wall Street Journal
When the credit crisis of 2008 hit the markets, the ratings agencies were crucified by Congress and Wall Street for their failure to correctly rate toxic assets, CDO's, and derivatives that helped create the economic disaster. Now, as the global economy moves headlong into an even greater crisis, agencies such as Moody's and Standard and Poor are no longer accepting bankers opinions on what is good and what is toxic, but are instead proactively rating sovereign nations, private banks, and US municipalities according to the true nature of their solvency.
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