(Bloomberg News) Five of the 15 states with top bond ratings from Moody's Investors Service may be downgraded because their dependence on federal revenue makes them vulnerable to a U.S. credit cut should talks to raise the debt limit fail.
Maryland, New Mexico, South Carolina, Tennessee and Virginia are under review, New York-based Moody's said in a statement today. The action affects $24 billion of general-obligation and related debt, Moody's said. The states are rated Aaa, Moody's top municipal grade.
Moody's said on July 13 it might cut the federal government's Aaa rating as congressional Republicans and President Barack Obama's administration failed to agree on raising the U.S. debt limit. Moody's said the next day it would scrutinize top-rated states, municipalities, housing programs and other debt issuers.
"Should the U.S. government's rating be downgraded to Aa1 or lower, these five states' ratings would likely be downgraded as well," Moody's said today. "Moody's will review the ratings of the five states on a case-by-case basis and announce any rating actions within seven to 10 days following a sovereign action."
Democrats and Republicans have been unable to agree to raise the government's debt limit with an Aug. 2 deadline looming. Without the ability to borrow, the Treasury would have to cut about $134 billion in spending during August to get outlays in line with revenue, according to a report by the Washington-based Bipartisan Policy Center.
Those cuts could imperil money states receive for programs such as Medicaid, which is the health-care program for the poor, public-works projects and education. An impasse could also rattled financial markets and push up interest rates for states, whose bonds track Treasury securities.
Moody's said it chose the five states because they are more vulnerable to economic fluctuations and depend more than the others on the federal government for employment and revenue.
The 10 top-rated states that Moody's said are less vulnerable to downgrades are Alaska, Delaware, Georgia, Indiana, Iowa, Missouri, North Carolina, Texas, Utah and Vermont.