Last week, Moody’s slapped a sector-wide negative outlook on the ratings of US local governments – an historic first, which may or may not explain why it took them five days to actually announce the move.
The report, written by Eric Hoffman, contends the following:
The negative outlook reflects the fiscal challenges local governments face as a result of the housing market collapse, dislocations in the financial markets, and a recession that is broader and deeper than any recent downturn. The current economic environment will clearly pose significant challenges for many if not most local governments.
Look out for “sharply falling property values, contracting consumer spending, job losses, and limited credit availability” – these are just some of what Moody’s described as a “long list of developments that will make balancing budgets in the coming year particularly difficult.”
But there’s an (important) caveat to the this sector-wide smackdown:
… the negative sector outlook does not suggest that the prospects for local government credit ratings are uniformly negative.
Its meaning is distinct from our rating outlooks for individual credits, which are predictive of future rating direction for that particular credit…The governance strength of individual issuers and their willingness and ability to adapt will determine the overall trend in individual ratings
If we were to take Moody’s literally (which is admittedly a very large if), we would posit that California ought to be a triple-A credit, because who’s stronger than the Governator?
Related links:
California’s nightmare – FT Alphaville