Moody’s Now Threatening Downgrade on 5 U.S. States

Ratings agency Moody’s (NYSE:MCO), which in recent weeks has warned that it will downgrade its AAA on the debt of the United States Federal Government, has now issued a new slate of threats to individual states. Today the “investor’s service” released a statement announcing that it has placed five states, Maryland, New Mexico, South Carolina, Tennessee, and the Commonwealth of Virginia, on review for possible downgrade from their current AAA bond ratings. The agency cites the states’ high federal employment and medicaid exposure as reasons for the review, which will affect a total $24 billion of rated debt.

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“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 has said that in the event that Washington does not come to agreement on a plan to raise the debt ceiling and enact spending cuts to reduce the deficit, a downgrade of its ratings on federal treasury bonds is highly likely. That downgrade would in turn trigger likely downgrades for the states listed above, and a possible review of an additional ten AAA rated states, “should the sovereign rating be lowered and move by more than one notch.”