By JEANNETTE NEUMANN
Downgrades of bonds issued by state and local governments could increase this year, according to a report to be issued Monday by credit-rating agency Standard & Poor's.
The $2.9 trillion municipal-bond market has been thrown into tumult in recent months, in part because of growing fears that some state and local governments will default on their debt. Investors have pulled out record amounts from muni-bond mutual funds, while the yields on muni bonds, which move inversely to price, have hit their highest levels since the depths of the financial crisis.
A downgrade of a government borrower would likely put downward pressure on the price of its bonds, resulting in higher borrowing costs and potential losses for investors.
Standard & Poor's says it expects greater muni-market volatility this year, but cautions that a rise in borrowing costs wouldn't add to municipalities' credit concerns unless bond yields were to surge.
While rating downgrades may increase in 2011 compared with recent years, S&P says the majority of state and local government borrowers will maintain their medium to high investment-grade ratings. Read More
Bonds by Jack Hough (Author Archive)
$125,000 Muni Warning Yields Backlash
State and local government bonds have broadly fallen in price since late September, when celebrity analyst Meredith Whitney began publicizing a 600-page report predicting widespread defaults and a new financial crisis. Whitney recently told interviewers that the market turmoil is validating her thesis, but a rising chorus of dissenters say her statements are alarmist and unfounded, and that the fear they've helped stir is further straining municipal budgets by raising the cost of borrowing.
The matter is made more complicated by the unusual secrecy surrounding Whitney's report. Many key municipal players say they've been unable to obtain a copy. Some say Whitney's firm quoted them a price that they found shocking.
"I think it violates what are considered to be today's standards of research and transparency," says Iris J. Lav of the Center on Budget and Policy Priorities, a think tank. Lav and co-author Elizabeth McNichol published their own report last Thursday countering some of Whitney's arguments without naming her. Strained budgets are a "cyclical problem that ultimately will ease as the economy recovers," they argue, and long-term problems like pension shortfalls are fixable. According to Lav, state and local debt payments total only 4% to 5% of spending in most states, with no state over 7%.
Lav hasn't seen the Whitney report because "they want $25,000" for a copy. That might have been a relative bargain. A municipal researcher at one major financial firm says his employer was quoted $125,000 and declined to buy a copy.
Read more: Analyst's $125,000 Muni Warning Yields Backlash - SmartMoney.com
