Buried inside this Bloomberg report on the credit rating agencies threat to downgrade the U.S. if it defaults on its debt was a nugget that ought to send shivers through Virginia’s political class:
Ratings directly linked to the U.S. government would move in step with any sovereign action, while some Aaa rankings of state and local governments may be vulnerable, Moody’s said in its report yesterday.
The Moody’s report is more specific as to what types of debt issues might be at risk. Of interest for Virginia are, among other things, GARVEE bonds, which the McDonnell administration and the General Assembly are using to pump additional monies into road construction. Virginia plans to issue$1.1 billion worth of these bonds. As those bonds are backed by anticipated federal highway funds, a default and debt downgrade could make such bonds more pricey.
But that’s only the beginning of the fun. According to Moody’s:
Aaa rated U.S. state and local governments that may be most susceptible to downgrade are ones that have greater relative economic volatility and have economies that would be more sensitive to reductions in federal spending, rely more heavily on capital market access for cash flow notes and variable rate debt, and whose budgets would be most affected to cuts in federal programs such as Medicaid.
On at least one of those counts — Virginia’s reliance on federal spending — a sovereign debt downgrade could spell trouble for the commonwealth. A Census Bureau report shows that Virginia ranks 2nd in the nation in per capita federal spending — narrowly trailing number one ranked Alaska.
Moodys and the other rating agencies want the debt ceiling to be raised. They view a sovereign default, even for a few days, as a catastrophic event that would materially harm more than just Uncle Sam’s credit score. This echos arguments from Fed chairman Ben Bernanke and Treasury Secretary Tim Geithner, which in some free market quarters is not so much an endorsement of the idea as it is a condemnation.
The Moodys/Geithner/Bernanke concerns are hardly universal. And recent history with other countries shows that defaults — big, small and “technical” — don’t necessarily mean we’ll all be living in caves. Iceland, which defaulted not that long ago, is now back in the debt market and doing quite well for itself.
No one will mistake the U.S. for Iceland…or Russia (which defaulted in 1998)…or Argentina (which defaulted in 2001). We are the biggest debtor, and our default would cause the greatest problems. But truth be told, the U.S. has defaulted before (the first time under the Washington administration in 1790 and again under FDR in 1933). Reports indicate that the sun still rose in spite of these financial setbacks.
But that was then, this is now and what, exactly, would happen if the federal government went into a full-on default is anyone’s guess. Hardly a comforting thought for Virginia’s money handlers.
(Cross-posted at Score Radio Network)