Federal-Debt Downgrade Would Affect Muni Market

I wrote yesterday that people in Washington don't seem to be clear about what is actually happening in debt markets--or what will happen as we sidle over towards default.  In part that's because there's no way of foreseeing all the fallout of such a disaster--the economy is too interlinked, too complicated.  But we are starting to see the outlines of some of the potential results:


At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody's Investors Service said.

An "automatic" downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody's said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.

Municipal debt including mortgage-backed bonds secured by the U.S. or agencies such as Fannie Mae and Freddie Mac, would be trimmed with the federal government, Moody's said. It didn't provide a total value for other state and local credits that may be affected, including housing authorities and nonprofits.

Now think about all the private entities that are affected by a default and/or a ratings downgrade, like pension funds and insurers.  Then shudder.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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