Downgrade could make life expensive for municipalities

Dollar bill notes pass through a printing press at the Bureau of Engraving and Printing in Washington, D.C.

JEREMY HOBSON: The downgrading by S&P continues. The rating agency has cut the AAA rating on thousands of municipal bonds that are tied to the federal government.

That means state and local government will have to pay more to borrow money when they issue municipal bonds for big projects like schools and hospitals.

Marketplace's Nancy Marshall Genzer reports.


Nancy Marshall Genzer: Traders have a pet name for the municipal bond market -- muni-land. And there's a saying in muni-land: cities and states can't have a higher credit rating than the country they're in. But there's disagreement over how much a downgrade could push up borrowing costs, and how fast that could happen.

Marilyn Cohen is president of Envision Capital Management.

Marilyn Cohen: The bond market, the muni market, isn't like the stock market. You won't see interest rates move up 3 percent in a week. Not in muni-land.

Cohen says borrowing costs will go up, but slowly, like a train chugging uphill. Other analysts think the train won't even leave the station.

Tom Doe heads up Municipal Market Advisors. He says cities and states are just not building many new highways or schools in this tough economy. That means they aren't issuing as many bonds.

Tom Doe: So there's less supply and there's still demand because investors are seeking the safety of municipals.

And the higher the demand goes, the less local and state governments will have to pay in interest. Doe doesn't see that changing anytime soon, no matter what S&P says.

In Washington, I'm Nancy Marshall Genzer for Marketplace.

About the author

Nancy Marshall-Genzer is a senior reporter for Marketplace based in Washington, D.C. covering daily news.

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