The Downgrade’s Real Casualties

August 10th, 2011 at 8:04 am David Frum | 19 Comments |

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Suzy Khimm at the Washington Post astutely identifies them: city governments. Which in turn means, order still more local austerity to come:

S&P’s is poised to downgrade thousands of municipal bonds that are directly tied to the federal government, look with an announcement expected later this week. In July, Moody’s recommended downgrading 7,000 muni bonds if the U.S. credit rating went down. While this secondary wave of downgrades is unlikely to shock the municipal bond market, it could reveal the vulnerable finances of some of the country’s more fiscally troubled towns and cities, ultimately putting them on shakier footing by making borrowing more expensive.

On the surface, municipal-bond watchers seemed relatively confident about the near-term health of the $2.9 trillion municipal market, where bond yields have remained low — a key indicator of investor confidence.

“The trend has been that they’ve been benefiting from the flight to security,” said Richard Ciccarone, managing director of McDonnell Investments. The bonds most likely to be downgraded will be “the safest of muni holdings” most closely tied to Treasurys, Ciccarone adds. The thinking goes: Because investors haven’t abandoned Treasurys, they won’t flee from muni bonds, either.

Many states and cities forced by law to balance their budgets have made painful, sweeping cuts to improve their balance sheets this year, and they’ve anticipated further cutbacks in federal aid. And they’re going to be better positioned for whatever comes next.

But then there are states and municipalities relying more heavily on federal support that are already on shaky fiscal ground. The federal government has committed to slashing trillions in funding under the debt-ceiling deal, and as such cuts materialize, they could have an outsize impact on these municipalities.

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19 Comments so far ↓

  • ottovbvs

    Well based on the impact of the downgrade of the US, a muni downgrade could mean their borrowing costs actually go down. Free money?

    I’m not saying they will of course but the inanity of the S&P downgrade of the US couldn’t be made more apparent than by these real yield curves. And for all the budget cutting right wing idiots, if you don’t borrow money when it’s free when do you borrow money?

    • Smargalicious

      The real casualty is Odumbo’s presidency.

      I hope Romney or Christie or Perry steam cleans EVERYTHING before they step foot in that house.


  • JimBob

    Free money. Otto and of course who else. The Princeton clown himself, Paul Krugman

    Now back on Planet Earth

    US needs to face reality, not QE3

    • ottovbvs

      Missed the MBA class on reading yield curves did you Jimbo? The two year yield this morning is at around 0.19 and the ten year at below 2.3. This IS HAPPENING NOW ON PLANET EARTH. God knows what planet you’re on. The possibility of QE 3 has absolutely nothing to do with the fact that US borrowing costs are currently zero.

      • JimBob

        I don’t care what the Yield curve is. As with all like minded idiots, you’ve been promising prosperity if we only spend more money and borrow more money. Remember it is free!!

        In the 1990s the bank of Japan kept interest rates at zero which enabled Japan to borrow money for well free. LOL

        • Banty

          Otto stop I don’t know if he can take any more edukayshun

        • ottovbvs

          Jimbo thinks it would be a great idea for US borrowing costs to rise when we’re running a 1.35 trillion deficit…go figure.

          Jimbo despite that MBA you claim to possess I know you’re economically illiterate so you’re not going to understand this but were Bernanke to announce a third round of QE bond rates would likely rise (so would gold prices which should be great news since you claim to sitting on mountains of the stuff). Rogers who I’ve met a few times back in the days when he was in NYC is a former partner of your hero George Soros and runs a hedge fund that specializes in shorting currencies, equities, bonds, commodities. Hence he produces this sort of bs to influence markets in the direction he wants them to go. He likes to encourage folks to panic in situations like this.

    • LFC

      US needs to face reality, not QE3

      Otto, you’ve got to calm down and admit it when JimBob is right. We do need to face reality. The reality is that despite record profits last year and record cash on hand, business isn’t hiring. Therefore we don’t need QE3, we need gov’t stimulus spending to keep the economy afloat until the people in our country have finally completed deleveraging their accumulated debt.

      We also need to face the reality that the gov’t simply doesn’t take in enough tax revenue, and the Bush tax cuts were a bust by every measure. And that those tax cuts never paid for themselves … not even close. And we need to face the reality that we can’t strictly cut our way to a balanced budget.

      I’m sure JB has all those things in mind when he said “reality”.

      • ottovbvs

        “Therefore we don’t need QE3, we need gov’t stimulus spending to keep the economy afloat until the people in our country have finally completed deleveraging their accumulated debt.”

        You need to calm down, improve your comprehension, and recognize QE 3 has very little to do with the fact that the US can currently borrow the funds for effectively zero to provide the fiscal stimulus that as you correctly say is required. I’m completely aware and have said so many times here (although it seems to have escaped your notice) that the real need is for fiscal stimulus to spur demand. Jimbo consistently says the opposite (which also seems to have escaped your notice). The whole point being (which also seems to have escaped your notice) there couldn’t be a better time to borrow $2 Trillion and spend it on a huge stimulus program. The problem is it’s not going to happen because of political gridlock. Hence conversations about QE 3 which is a purely monetary remedy with all its limitations.

  • teabagger

    In my limited time following FF I found I can always count on smeg/jimboob to impart relevent words of wisdom. NOT!

  • JohnMcC

    As I grow old I find I repeat what I said, but I will say it again anyhow. The increase in borrowing cost will fall on municipalities and hospitals and universities. So if one lives on the end of a dirt road in Idaho, prays away illness and doesn’t need to learn anything…NO PROBLEM!!

  • JimBob

    For the past two years under Helicopter Ben Bernanke we’ve had a policy of free money basically. The economy has only gotten worse. The real unemployment rate is closer to 20 percent, housing continues to go down and every time Bernanke opens his mouth the dollar tanks.

    Bernanke has to go, interest rates need to rise so the economy can heal itself. All we’ve been doing is trying to reinflate the bubble. It never works.

  • ottovbvs

    “interest rates need to rise so the economy can heal itself.”

    Where did you say you got that MBA from Jimbo? Charlie’s Tavern? If you want bond rates and therefore general interest rates to rise a huge committment to QE (conservative economist Ken Rogoff suggested $2 trillion) would certainly do it.

  • Oldskool

    Nets would be a good stock right now, the ones big enough to wrap around the outside of tall buildings.

  • ggore

    This is amazing when you get right down to it. The Republicans said they would never accept tax increases, loophole closures, nothing that would help bring down the deficit by bringing in any new revenue. Then the Republican-controlled House of Representatives blackmailed the country and the President with threats to take down the economy and the country, which in the end caused the downgrade to our credit rating because there were not enough budget cuts to do any real good. This in turn caused the stock market crash, which has caused serious hurt to the VERY PEOPLE the Republicans were trying to protect, the ultra rich! The rich hold vast quantities of stock, controlling interests, they are the CEO’s and board members of major “job creating” corporations, etc, and they have seen that wealth vanish in the past couple days, all because the Republicans said they would not make them pay one cent in taxes. The Republicans screwed the very people they said they would never tax. Just amazing.

    • Oldskool

      And their no-tax obsession is the opposite of the general public’s by a wide margin. I don’t think they’re trying to protect anyone in particular, I think they’re using it to undermine anything Obama tries to do. If he were to pull us out of this disaster, even with their help, he’d get most of the credit. And the country’s interests always seem to take a back seat to their own interests. So far, they’ve been willing to shudown the government, impeach Clinton and then raid the Treasury for eight years, among other outrages.