Moody’s Downgrades More Munis in 2012

Despite the seeming recent asset based recovery in the US, fiscal conditions of states remains highly fragile.

One of the major credit rating agency, Moody’s has downgraded more muni papers this year than in 2011.

From Bloomberg

Credit-rating cuts were made on more than $200 billion of municipal securities in the first nine months of this year, exceeding the total for 2011, and there’s no end in sight, Moody’s Investors Service said.

Port Authority of New York and New Jersey, Puerto Rico Sales Tax Financing Corp., Chicago O’Hare Airport Enterprise and Pennsylvania state debt accounted for more than 70 percent of third-quarter downgrades alone, affecting about $75 billion of securities, Moody’s said today in a report.

“Increased risk associated with difficult economic and industry environments, stressed budgetary and reserve positions, and challenging debt structures are the principal factors driving the downgrades,” Eileen Hawes and other Moody’s analysts said in the report.

State and local economies are still feeling the lingering effects of the last U.S. recession, which ended in June 2009. Unemployment has risen for four straight months in Pennsylvania, to 8.2 percent last month from 7.4 percent in May, according to data compiled by Bloomberg. The New York jobless rate surged to 9.1 percent in July and August from 8.2 percent in December, before declining to 8.9 percent last month.

“Local government credit quality will likely continue to deteriorate through the end of 2012 and be reflected in elevated downgrades as state funding and property-tax revenues continue to lag as expenditure pressures persist,” the Moody’s analysts said in the report. “We expect overall downgrade activity to continue to surpass upgrades through the end of 2012.”

In a report yesterday, Moody’s said more local governments are set to fall below investment grade in the coming year.

Although I don't trust credit rating agencies as they have been partly responsible for the last crisis, I share their concern over the current conditions of state governments in the US, such that should another bubble bust occur soon, through a recession or financial crisis or a combination of, dire financial conditions on the state-muni level will likely not only worsen but spread to the Fed level.