Standard & Poor’s downgrade of the federal government may lead to a wave of municipal ratings cuts after all.
After saying earlier this month that most top-rated states and local governments would keep their AAA ratings, S&P said yesterday that more downgrades could come after the U.S. budget is finalised.
According to a statement from the ratings agency, reductions in federal funding could put further pressure on already-strained state and local budgets, negatively impacting municipal credit ratings.
From the statement:
In our opinion, the longer-term deficit reduction framework adopted as part of the Budget Control Act of 2011 (BCA) could undermine the already fragile economic recovery and complicate aspects of state and local government fiscal management. Either of these outcomes could potentially weaken our view of certain individual credit profiles of obligors across the sector. But given the disparate nature of state and local economies, differing levels of reliance on federal funding, and varying management capabilities throughout the U.S., we anticipate the effects on credit quality from the BCA will likely be felt unevenly across the sector.
The federal government already plans to cut $7 billion in state aid, but most of the cuts won’t be enacted until 2013 so states will have time to prepare, S&P analyst Gabriel Petek told Bloomberg.
The news is the latest escalation in the battle between S&P and the Obama administration. The New York Times reported earlier this week that the Department of Justice has opened an investigation into S&P’s mortgage securities ratings in the years leading up to the financial crisis.
The ratings agency said Thursday that it will begin reviewing state and local governments on Nov. 23, the date that the Congressional “super committee” is scheduled to release its deficit reduction recommendations.