The chance of the U.S. having its credit rating downgraded is pretty good, even if an agreement on the debt ceiling is reached. But Moody’s has also placed on “Watchlist for possible downgrade” the Aaa ratings of 162 local governments in 31 states, “with the heaviest concentrations in Virginia and Massachusetts.” (Emphasis mine.)
This is because Moody’s believes these local bonds are likely to be affected by the “credit deterioration of the sovereign.” In other words if the sovereign — that’s the Federal government — can’t get its act together, these local bonds are also in jeopardy.
Virginia’s state government is already under review for possible downgrade (along with four other states: Maryland, New Mexico, South Carolina, and Tennessee). Now a bunch of locals are facing downgrades:
- Arlington County
- Charlottesville City
- Chesterfield County
- Fairfax City
- Fairfax County
- Fairfax County Water Authority
- Hanover County
- Henrico County
- Loudoun County
- Prince William County
- Vienna Town
- Virginia Beach City
Note that these governments are facing a possible downgrade. They’re “indirectly” linked to the Federal rating, so a federal downgrade doesn’t necessarily mean they’ll also be downgraded.
At this time, Moody’s considers their ratings to be resilient to a one-notch downgrade of the U.S. government’s bond rating. Should the sovereign rating be downgraded by more than one notch, Moody’s would likely assess whether these remaining Aaa ratings should also be placed on review for downgrade.
Still, there’s a danger there. A lower credit rating would make it more expensive for these counties and cities to borrow money, meaning costs would rise and add more stress to budgets. That means cuts to everything from schools to police to road repair to all those things people want but don’t want to pay for.