It is unimaginable how far this debt ceiling issue has gone. The deadline of August 2, 2011 is just a week away and still nothing. It is just like Europeans really. American econs criticised Europe for reacting late on Greece in 2010 and now are facing the same music.
Moody and S&P had raisd concerns that US could be downgraded if these debt ceiling/deficit issues continue. Just to further the problems, Moody’s has released this list of 5 states which are going to be adverself effected by this issue of US Federal deficit and debt.
The five states are:
- New Mexico,
- South Carolina,
- Tennessee, and
- the Commonwealth of Virginia.
What is the basis? These states are more closely linked with federal budget:
“While all states are indirectly linked to the U.S. government to some degree, we have identified the five Aaa-rated states that are most vulnerable to changes in the U.S. government rating,” said Nicholas Samuels, a Vice President in Moody’s State Ratings Team. These five states have above average exposure to several sovereign risk factors that Moody’s outlined in a July 13 special comment, “Implications of a U.S. Rating Action for Aaa-Rated U.S. Municipal Credits.” The risk factors are macroeconomic sensitivity, capital markets reliance, and dependence on federal revenues, offset by financial resources available to counteract those risks.
Moody’s will perform additional analysis of the sovereign risk factors in the five affected states on a case-by-case basis, and examine additional mitigants to determine if their financial position and governance are strong enough to negate the impact of a potential U.S. downgrade. In the event the U.S. government’s Aaa rating is downgraded due to a default following a failure to raise the debt ceiling, Moody’s will not automatically downgrade these five state ratings but will proceed with case-by-case reviews.
Barring South Carolina, most states have above average Federal employees as % of laborforce. In case there are problems, there will be problems with their salaries etc.
NYT has a nice article where Virgina’s Governor complains that Federal govt is responsible for this:
“For nearly 75 years we have worked hard to earn the highest credit ratings from all three rating agencies,” Gov. Bob McDonnell of Virginia, a Republican, wrote this week to President Obama and members of Congress, urging them to raise the debt limit. “Now your failure to get the job done is hurting the businesses and citizens of our commonwealth.”
Then Americans are muffled (as other are as well) why all this is being allowed:
Many state and local officials are still hoping that a deal will be reached, averting a situation in which federal payments to the states could start to be cut in August. But a number of states have begun preparing for the worst.
Ric Brown, Virginia’s secretary of finance, said that it was a difficult task, made much more difficult by the lack of concrete information coming from Washington. “What you’ve got at the federal level, let’s face it, is outright chaos,” he said in an interview. “It’s hard to make sense out of that.”
Maryland, the uncertainty over what will happen in Washington is complicating the state’s plans to sell bonds for school construction and to refinance some existing debt. The sale was pushed back to Monday after the state was warned that the debt ceiling debate could harm its credit rating.
Mayors are also watching the debate in Washington nervously. Several said in interviews that they were not worried in the short term. But some, including Mayor Ralph Becker of Salt Lake City, said they were worried about the general economic harm that a federal default would cause. “We all fear and see the specter, the dark clouds that would hide our beautiful blue skies and mountains,” he said. “It’s hanging over us.”
It is even hanging over us.
This has obviously led to worries over US Federal govt as well. What was not even a probability has become a small probability. Policymakers are looking at possible scenarios if the ceiling is not revised upwards. Unbelievable events but all happening real time..