Saturday, August 6, 2011

Coming Monday: Domino Ratings Downgrades

It is extremely difficult to know in advance what the impact of the S&P downgrade of U.S. government debt will mean for many other organizations. It really depends on by-laws, other agreements and other investment restrictions written into how funds must be managed at organizations. A downgrade by S&P may be enough to require some to sell Treasury securities. It may have no impact on other organizations.

One thing that may be an immediate problem is the ability of some states to raise money cheaply. WSJ explains:

The U.S. debt downgrade could pose another hurdle for battered state and local governments.
Standard & Poor's announced Friday it cut the U.S. government's debt rating to AA+ from AAA, in an unprecedented move in the nation's history. While it is difficult to gauge the impact of a downgrade from just one of the three major credit-ratings firms, it could pose challenges to states and localities closely entwined with the federal government.

"The downgrade of U.S. federal debt could result in de facto credit downgrades of some state-level…debt, which has been priced and rated as if the federal government were the backer of last resort," Jason Schenker, president of Prestige Economics LLC, wrote in a note to clients Saturday.

Mr. Schenker said the cost of refinancing debt is likely to become more expensive, which "could result in a further bleeding of state and local government jobs."...

The downgrade poses another risk. "It's an extreme concern to any state if their ratings were to decline in any way," Scott Pattison, executive director for the National Association of State Budget Officers said in a interview before S&P made its decision public. "That could have significant impacts," such as higher borrowing costs over the long term, he said.
As part of its downgrade of Treasury debt statement, S&P said it would have further comment on Monday with regard to the Treasury downgrade and its ramifications for other entities:
On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors
Bottom Line: Monday will be Domino Downgrade Monday


  1. The Ghost of Meredith Whitney haunts again.

  2. Wonder what the predator-in-chief in the White House will do about this......