An August 2 Baltimore Sun article discusses the House passage of the federal government’s proposed debt ceiling agreement, but the deal’s impact on state and local government credit ratings could remain undecided for some time. Even if the deal passes the Senate later this afternoon and is signed by the President, it remains questionable as to whether the agreement will satisfy the concerns of the credit rating agencies about the federal government’s significant deficit.
As previously reported by Conduit Street in July 29 and July 26, if the federal government’s credit is downgraded, Moody’s has indicated it will review the credit ratings of Maryland, New Mexico, South Carolina, Tennessee, and Virginia due to their heavy reliance on federal and military employers. In Maryland, Moody’s also stated that it would review the ratings of Baltimore, Harford, Howard, Montgomery, and Prince George’s counties.
If a government’s credit rating is downgraded, the government will receive a less a favorable interest rate when issuing bonds, which increases it costs and will reduce the amount on which it could borrow against. If Maryland’s credit rating were downgraded, it could reduce State funding for school construction and Program Open Space (which is currently funded through bonds).
The response of the rating agencies to the federal government’s agreement remains to be seen but on July 29 Moody’s indicated the following:
Our review of the US rating will end when one of two events occur: a government default on Treasury debt obligations or a raising of the debt limit. The outcome of longer term deficit reduction negotiations will affect the rating outlook…
This suggests that even though the federal government’s agreement on the debt ceiling will stave off any immediate reactions by the rating agencies, the federal government could still be subjected to a downgrade based on whether the agencies are satisfied with the government’s progress in reducing its ongoing deficit. Additionally, the proposed federal cuts will likely have a significant impact on both Maryland and its local governments. See this August 2 Conduit Street post for more details.