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CHICAGO (Reuters) - U.S. states are likely in for a rash of negative rating actions over the next two years as the ailing U.S. economy continues to hammer their budgets.
"There's going to be more to come," said Richard Larkin, research director at Herbert J. Sims & Co in Iselin, New Jersey, regarding recent rating actions. "This is just the tip of the iceberg."
Just this week, Standard & Poor's Ratings Services warned it could downgrade the general obligation ratings of both California and Illinois. Fitch Ratings revised the outlook on Florida's "AA-plus" GO rating to negative from stable, citing poor economic performance.
Larkin said he expected municipal bond issuers to be hit with rating downgrades over the next year or two.
"I think any state or city that has to issue short-term debt to fund operations...those issuers are the most vulnerable," he said, adding that big note issuers like New York City and State would be on that list.
Chris Mier, a muni analyst at Loop Capital Markets in Chicago, said the belief that states were better positioned to handle an economic slowdown this time around has been shattered as "the rate of the decline in the economy has exceeded anybody's wildest expectations."
He said ratings downgrades could further exacerbate problems in the municipal market that include illiquidity, tax-exempt mutual fund outflows, and bond insurer woes.
One of the things on President-elect Barack Obama’s early wish list in the first few days of his administration is a huge stimulus package, reportedly in the area of $500 billion to $1 trillion dollars
He has proposed creating a digital database that details how each and every dollar of taxpayer money is being spent and this huge infrastructure project provides ample opportunity to do so.
Because a large chunk of that money will be funneled to state and local governments to be spent on infrastructure projects, there are enormous opportunities for waste, fraud and abuse.