Outside the Beltway

Even More Evidence of the Negative Consequences of not Raising the Debt Limit

Steven L. Taylor · Monday, July 18, 2011 · 3 comments

Politico posts a report from MF Global that notes a failure to raise the debt ceiling would impact not just the federal government’s bond ratings, but local governments as well.

From the report:

• In addition to placing the U.S. Government’s debt under review, Moody’s also placed on review approximately 7,000 Aaa-rated muni issuances with direct links to the U.S. debt.
• Over the next two weeks, Moody’s will likely place on review for downgrade thousands of additional Aaa-rated muni issuances with indirect links to federal debt and liquidity.
• We believe that Moody’s has correctly identified threats to hospitals, some local governments and all state governments, as they rely on government revenue streams – particularly, Medicaid funds; but we think the problem may be even larger.
• We think Moody’s understates the threat to issuers that rely on federal education funds to sustain their normal
  operations.
• We believe that there could be a domino effect.  If the prospect of a federal government shutdown continues to loom large, ratings agencies will be compelled to look more carefully at local school districts and municipalities that have issued securities for purposes of undertaking capital protects in support of primary and secondary education.

But, don’t listen to experts on the bond market, because what do they know?