Monday, August 8, 2011

May You Live in Interesting Times

Georgia State Capitol building in Atlanta, Geo...
Georgia State Capitol Building
Image via Wikipedia
Let's start with what we know about the bond rating issue and how it might affect the state of Georgia. Frankly, at this moment, it's not much.

Standard & Poor's (S&P) had reduced the bond rating of the federal government from AAA to AA+ while Moody's Investors Service and Fitch Ratings, apparently satisfied with the recent budget agreement, have allowed the US to retain their highest debt ratings.

Georgia is one of only eight states to have earned the highest debt rating from all three services - at least for now. It remains to be seen if S&P will be willing to rate individual states higher than the federal government. It may depend upon how much of a state's AAA rating is based upon backing from the federal government.

While apparently satisfied with the budget accord reached on August 2nd, Moody's did release a statement dated August 4th, that is interesting. In part, it states:

With the raising of the federal debt ceiling, the risk of a U.S. default is removed, and the Aaa ratings assigned to the U.S. government, and directly and indirectly linked U.S. public finance ratings have been confirmed. While these indirectly linked issuers' outlooks were moved to negative as a group based on the identification of certain shared characteristics, their outlooks will be reviewed on a case by case basis in the coming weeks. In order to have a stable outlook, an issuer will need to have credit quality that could be expected to remain higher than that of the U.S. government in the event that the sovereign were downgraded from Aaa.

It is worth noting that while Moody's did not downgrade US debt, it was reviewing its municipal bond ratings for states and municipalities in cases where their debt is directly related to the US debt. There is no reason to believe S&P will not do the same. It would be logical if Fitch Rating had undertaken the same steps.

So what does that mean for Georgia and Georgia municipalities? At this point there is not an indication that any of the services will downgrade our state debt, but even if S&P does do so, Moody's and Fitch have given no indication that they would follow suit.

There will likely be changes ahead even if the state's debt ratings remain constant It will be surprising if there is not at least some contraction in federal spending. In the past, states and municipalities have been left with fewer funds and more responsibilities when federal spending was reduced.

The Georgia legislature has done a good job of keeping its head above water given the current economy and despite internal conflicts. Speaking of those internal conflicts, S&P was open about its dislike of unresolved conflict; just a word to the wise.

We can now expect higher scrutiny from the debt ratings services and less resources from the federal government. The belt tightening at the state and local level is not yet over. A rough road has gotten a little rougher for a little longer.

by Ken Carroll
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