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- iHaveNet.com: Economy
by Meg Handley
States and local governments could face repercussions following S&P's downgrade of U.S. debt
State and local governments could face higher borrowing costs and tighter budgets following the first-ever downgrade of U.S. debt, which could result in more job cuts and reductions in social services, experts say.
Credit rating agency Standard and Poor's revised ratings for numerous municipal bond issuers, including
school-construction bonds in Irving, Texas, debt backed by a federal lease in Miami,
and a bond series for multifamily housing in Oceanside, Calif.,
A recent
"It's really about how much funding [state and local governments] get from the federal government," says Ron Florance, managing director of investing strategy at
As with
Higher borrowing costs could imperil some state and local governments already facing fragile budgets. Add to that the potential for reduced federal funding on the heels of the debt-ceiling deal forged in August that calls for more than $2 trillion in total spending cuts, and states and local governments could have an even bigger budget shortfall to fill.
"There's a combination of the worry that [states and local governments] will cut back on spending further, which is obviously not good for employment or that they'll have to issue more debt to try to make up the shortfalls," says Laura LaRosa, director of fixed-income strategy at investment and wealth management firm Glenmede.
In 2010, states and local governments received more than $470 billion in federal funding for education, unemployment benefits, and
Despite the bleak economic environment of the past several years, states and local governments have proved relatively resilient, says Tom Kozlik, municipal credit analyst for Philadelphia-based financial services firm
While Kozlik doesn't anticipate sweeping downgrades of municipal issuers in the coming weeks, he says a lot is still up in the air concerning
Many questions remain about the future of the global financial system, now that U.S. debt no longer commands the coveted AAA rating. While it seems the immediate fallout may be a temporary market selloff, the United States may face longer-term effects as well, which could further hobble an already stumbling economy.
"When we look out a couple of years, the downgrade will have had an impact by ultimately raising borrowing costs," McBride says. "The additional money going toward interest payments [will be] money not being spent elsewhere in the economy."
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