Survival And Prosperity

City Of Chicago On Review For ‘Possible Downgrade’ By Moody’s

“We still have a very strong bond rating. Our fiscal position is getting better every year and we are aggressively managing our liabilities and obligations.”

-City of Chicago Comptroller Amer Ahmad, July 20, 2012, as noted in a July 22, 2012, Chicago Sun-Times article

I’ve been warning Survival And Prosperity readers for some time that the City of Chicago’s finances are not as peachy keen as City Hall would like outsiders to believe.

So much so, the City’s credit rating is on review for a possible downgrade by Moody’s Investors Service. From the Moody’s website earlier today:

Moody’s has announced its final approach to the way it will analyze and adjust pension liabilities as part of its credit analysis of state and local governments. These changes reflect the rating agency’s view that pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations. As a result of this new approach, Moody’s has also placed the general obligation ratings of the cities of Chicago, Cincinnati, Minneapolis, and Portland, OR, and of 25 other US local governments and school districts on review for possible downgrade. The entities whose ratings have been placed on review have large adjusted net pension liabilities relative to their rating category…

Moody’s rates over 8,000 local governments in the United States. Less than 1% of those with general obligation or equivalent ratings have been placed under review because of the new pension adjustments.

(Editor’s note: Italics added for emphasis)

Great. Chicago is in another “select group” it really doesn’t want to belong to these days.

You can read the entire announcement on the Moody’s website here.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Tags: Amer Ahmad, Chicago, City of Chicago, credit ratings, Illinois, local government, Moody's, pensions, public pensions

Illinois Bond Issue Halted Due To Credit Concerns

Today, residents of the state of Illinois saw the repercussions of having $8 billion of unpaid bills, a $96.8 billion pension funding gap, and falling credit ratings. Karen Pierog reported on the Reuters website:

Illinois yanked a $500 million general obligation bond issue slated for Wednesday because of credit concerns that could boost its borrowing costs, in the latest financial blow to the state, which has failed to fix its bloated public pensions.

Investment banks that planned to bid on the debt indicated investors would demand higher yields on the 25-year bonds, said John Sinsheimer, Illinois’ capital markets director.

“We were getting indications of higher spreads than we were anticipating,” said Sinsheimer, who declined to discuss specific spread levels. “We felt it was prudent to pull the deal for the time being.”

(Editor’s notes: Italics added for emphasis)

Pierog pointed out:

Illinois is already faced with the highest spreads – 137 basis points in the latest week – over Municipal Market Data’s benchmark triple-A scale among states and cities tracked by MMD, a unit of Thomson Reuters.

Over the weekend, I noted Standard & Poor’s downgraded the State of Illinois on Friday to an “A-” rating with a negative outlook- last among all 50 states. I added that among other major credit rating agencies, Moody’s also ranks Illinois last of all the U.S. states and Fitch ranks it 49th but on watch for a possible downgrade.

As for Illinois taxpayers? They may have to pay tens of millions of dollars more in interest when the state looks to borrow more money- like what almost happened today.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Pierog, Karen. “UPDATE 2-Illinois pulls $500 mln bond sale amid credit concerns.” Reuters. 30 Jan 2013. (http://www.reuters.com/article/2013/01/30/illinois-bonds-idUSL1N0AZ6TQ20130130). 30 Jan. 2013.

Tags: credit ratings, Fitch, government bonds, Illinois, John Sinsheimer, Moody's, pension crisis, pensions, public pensions, S&P, Standard & Poor's, state government, State of Illinois

S&P Downgrades Illinois Credit Rating To Worst In Nation

When I heard a major credit rating agency had downgraded Illinois Friday, the term “death spiral state” quickly came to mind.

And then my thoughts turned to the tens of millions of dollars Illinois taxpayers might be on the hook for down the road.

Ray Long and Monique Garcia reported on the Chicago Tribune website Friday:

Illinois fell to the bottom of all 50 states in the rankings of a major credit ratings agency Friday following the failure of Gov. Pat Quinn and lawmakers to fix the state’s hemorrhaging pension system during this month’s lame-duck session.

Standard & Poor’s Ratings Service downgraded Illinois in what is the latest fallout over the $96.8 billion debt to five state pension systems. The New York rating firm’s ranking signaled taxpayers may pay tens of millions of dollars more in interest when the state borrows money for roads and other projects.

(Editor’s note: Italics added for emphasis)

Illinois now has an “A-” rating with a negative outlook from S&P. Among other major credit rating agencies, Moody’s ranks Illinois last among the 50 states and Fitch ranks it 49th but on watch for a possible downgrade.

Regarding the state’s huge pension funding gap, Mark Peters wrote on the Wall Street Journal website Friday:

S&P estimates the pension system in the coming year will see assets fall to 39% of future obligations.

(Editor’s note: Italics added for emphasis)

Hardly any talk about the crisis in the local mainstream media outlets this weekend. Amazing. I can’t understand why more Illinois residents aren’t up in arms over this humongous financial mess the state is in.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Garcia, Monique and Long, Ray. “Illinois credit rating sinks to worst in nation.” Chicago Tribune. 25 Jan. 2013. (http://articles.chicagotribune.com/2013-01-25/news/chi-illinois-credit-rating-sinks-to-worst-in-nation-20130125_1_action-on-pension-reform-robin-prunty-illinois-credit). 27 Jan. 2013.

Peters, Mark. “S&P Cuts Illinois Credit Rating.” Wall Street Journal. 25 Jan. 2013. (http://online.wsj.com/article/SB10001424127887324539304578264293106044944.html). 27 Jan. 2013.

Tags: credit ratings, Fitch, Illinois, Moody's, pension crisis, pensions, S&P, Standard & Poor's, state government, State of Illinois

Moody’s Revises Illinois’ Credit Rating Outlook To Negative

Moody’s Investors Service, a major Wall Street credit rating agency, announced yesterday that it has revised its rating outlook for the State of Illinois from stable to negative. Illinois is already Moody’s lowest-rated state. From the agency’s website Thursday:

Rating Action: Moody’s revises State of Illinois’ rating outlook to negative from stable; general obligation rating affirmed at A2

Global Credit Research – 13 Dec 2012

Action applies to approximately $33 billion of outstanding general obligation and related debt

New York, December 13, 2012 — Moody’s Investors Service has revised the State of Illinois’ credit outlook to negative from stable, while affirming the state’s general obligation debt rating at A2. The state has about $28 billion of G.O. bonds outstanding. We have also affirmed related ratings assigned to state borrowings, including about $2.6 billion of debt issued by the Metropolitan Pier & Exposition Authority, rated A3, and the state’s Build Illinois sales tax revenue bonds, rated A2, of which $2.7 billion are currently outstanding. The negative outlook is linked to ratings on the G.O. as well as the related credits.

SUMMARY RATING RATIONALE

The negative outlook reflects our view that the state’s pension funding pressures are likely to persist and perhaps worsen in the near term. Moreover, fiscal 2014 marks the last year before Illinois’ 2011 income tax increases are partly unwound, putting the state on track to deal with simultaneous growth in pension funding needs and loss of revenue. If the legislature in coming weeks or months enacts significant pension reforms, they are almost certain to be challenged, given the state’s constitutional protection of retiree benefits. Political pressures, coupled with the threat of litigation, may mean that any reforms enacted have only a marginal effect on liabilities. Despite a diverse economy with above-average wealth, lackluster demographic and economic characteristics indicate that, even with continued US economic improvement, the state’s existing tax structure will not provide enough revenue to address the rising cost of pension benefits and other state expenses. In addition, the state’s payment backlog remains high.

(Editor’s note: Italics added for emphasis)

Back on January 13, 2011, Illinois Governor Pat Quinn signed legislation authorizing a 67 percent increase in the personal income tax of Illinois residents and a 46 percent increase in corporate income taxes on Illinois businesses. In 2015, these taxes are scheduled to be rolled back from 5 percent to 3.75 percent and 7 percent to 5.25 percent respectively. However, as I noted that same day:

The last time income tax rates in the “Land of Lincoln” went up in 1989, politicians also claimed it was as a temporary increase to combat a financial “rough patch.” But the rates never came down and by 1993 were designated permanent. Until now, that is.

I won’t be surprised if lighting strikes Illinois residents and businesses twice.

You can read the entire rating action report on the Moody’s website here.

Tags: credit ratings, government bonds, Illinois, income taxes, Moody's, Moody’s Investors Service, Pat Quinn, pension reform, pensions, state government, State of Illinois, tax hikes

Is Illinois Greece?

If California is Greece, then Illinois is Spain.

-Panelist at June’s “State of the Nonprofit” conference in Chicago (hat tip The Greater Good blog)

The proverbial brick wall keeps getting closer in Illinois. And even though the state’s financial woes- and what needs to be done to fix them- are painfully obvious, the politicians carry on as if it were business as usual.

The problem is, it’s not. And years of fiscal mismanagement are really starting to bite the “Land of Lincoln” in its rear-end.

Take the state’s credit ratings, for example. From Karen Pierog on the Chicago Tribune website yesterday:

Illinois lawmakers’ inability to reform a woefully underfunded public retirement system at a special session last Friday is likely to weigh on the state’s already relatively low credit ratings.

“We are in the process of reviewing the total credit picture, including the budget, pensions, etc,” Standard & Poor’s Ratings Services analyst Robin Prunty said on Tuesday.

“But certainly, the lack of action on pensions is not a credit positive.”

Pierog, who is affiliated with Reuters, added:

S&P, which rates Illinois A-plus with a negative outlook, put the state on notice in March that it could face a multiple-notch general obligation rating downgrade if there is no “credible progress” in taming its huge $83 billion unfunded pension liability and on tackling a structural budget imbalance.

Another credit rating agency, Moody’s Investors Service, downgraded the State of Illinois to A2 from A1 earlier this year.

According to the California State Treasurer’s website this morning, California’s S&P and Moody’s credit ratings are A- (lower than Illinois) and A1 (higher than Illinois), respectively.

But it’s not just credit ratings where years of poor policymaking are coming back to haunt the state. Pierog noted:

Investors are demanding higher yields to invest in Illinois’ bonds as its so-called credit spread over Municipal Market Data’s benchmark triple-A scale for 10-year debt is the widest at 157 basis points among major U.S. city and state debt issuers tracked by MMD, a unit of Thomson Reuters. California’s spread by comparison is less than half of Illinois’ at 66 basis points.

Perhaps that panelist got it wrong. California could be Spain, and Illinois, Greece.

Source:

Pierog, Karen. “Illinois’ inaction on pensions in rating agency crosshairs.” Chicago Tribune. 21 Aug. 2012. (http://www.chicagotribune.com/news/sns-rt-us-illinois-pension-ratingbre87k0uj-20120821,0,6367324.story). 22 Aug. 2012.

Tags: budget deficits, California, credit ratings, government bonds, Greece, Illinois, Illinois bonds, Illinois credit ratings, Illinois General Assembly, Moody's, pensions, public pensions, Spain, Standard & Poor's

Moody’s Says Greece Default ‘Virtually 100%’

While Jim Rogers and I don’t anticipate an authentic U.S. default in the coming days, one European nation is heading in that direction. From Moody’s Investors Service yesterday:

Moody’s Investors Service has today downgraded Greece’s local- and foreign-currency bond ratings to Ca from Caa1 and has assigned a developing outlook to the ratings.

The combination of the announced EU support programme and debt exchange proposals by major financial institutions implies that private creditors will incur substantial economic losses on their holdings of government debt. The rating’s developing outlook reflects the current uncertainty about the exact market value of the securities creditors will receive in the exchange. After the debt exchanges have been completed, Moody’s will re-assess the credit risk profile of any outstanding or new securities issued by the Greek government.

The announced EU programme along with the Institute of International Finance’s (IIF’s) statement (representing major financial institutions) implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%. The magnitude of investor losses will be determined by the difference between the face value of the debt exchanged and the market value of the debt received. The IIF has indicated that investor losses are likely to be in excess of 20%.

(Editor’s note: Italics added for emphasis)

According to Moody’s Global Credit Research unit, all is not lost in Greece. They noted:

Looking further ahead, the EU programme and proposed debt exchanges will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden. The support package for Greece also benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt. However, Greece will still face medium-term solvency challenges: its stock of debt will still be well in excess of 100% of GDP for many years and it will still face very significant implementation risks to fiscal and economic reform.

(Editor’s note: Italics added for emphasis)

I blogged about the potential consequences for the United States should Greece default back on June 2 and July 6.

You can read Moody’s entire explanation for their downgrade of Greek debt on their website here.

Tags: credit ratings, Greece, Greek government bonds, Moody's, sovereign debt crisis

Moody’s Warns Of U.S. Rating Downgrade If No Progress Made On Increasing Statutory Debt Limit In Coming Weeks

I happened to be pulling into a supermarket parking lot this evening when I heard the following on the radio. From the Moody’s Investors Service website tonight:

Announcement: Moody’s Updates on Rating Implications of US Debt Limit, Long-Term Budget Negotiations

New York, June 02, 2011 — Moody’s Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government’s rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody’s to change its outlook to negative on the Aaa rating…

(Editor’s note: Italics added for emphasis)

The entire announcement can be viewed on Moody’s website here.

Tags: credit ratings, debt limit, Moody's, U.S. credit rating

What Would A Greece Debt Default Mean For The United States?

As much as Europe would like to, it can’t seem to shake the ongoing sovereign debt crisis. In recent weeks, a lot of attention has focused on Portugal. Now, it’s shifting back to Greece. And just because the United States is across the pond from Europe, it may not be immune from the repercussions of a Greek debt default should it get to that point. From Maria Petrakis on Bloomberg.com this morning:

Greece’s local and foreign currency bond ratings were cut to Caa1 from B1 by Moody’s Investors Service, which cited a growing risk that the country will default on its debt.

Moody’s said the outlook on Greek debt is negative, meaning that the rating could be reduced further. The rating is seven steps below investment grade and puts Greece below Montenegro as the lowest-ranked European nation.

“Greece is increasingly likely to fail to stabilize its debt ratios within the timeframe set by previously announced fiscal consolidation plans,” Moody’s said today in a statement. The country is also unlikely to meet its previously announced budget targets for 2011, it said.

European officials readying Greece’s second bailout in two years are preparing to ask investors to reinvest in new debt when existing bonds mature, overcoming central bankers’ objections to any restructuring. European leaders are trying to prevent the euro area’s first sovereign default after last year’s 110 billion-euro ($158 billion) rescue failed to prevent an investor exodus from Greece.

(Editor’s note: Italics added for emphasis)

Newsmax.com’s Forrest Jones pointed on May 29th that serious concerns exist over what a Greek default may mean for the United States:

Any default in Greece would pummel not only the economy there but spread across Europe and eventually to the United States, inflicting economic damage similar in speed to the subprime housing crisis from just a few years ago, says financial expert and author John Mauldin.

The problem, Mauldin tells Yahoo! Daily Ticker, is that banks all across Europe are exposed to Greece.

Should Greece default on its debt, the country would likely convert back to the drachma.

Immediately, all bank depositors would default on their debts due to the sudden weakening of their currency.

French and German banks would then write down their Greek exposure, and so would the European Central Bank (ECB).

On top of that, U.S. banks have been taking on risk in Europe via writing credit default swaps, instruments made famous during the U.S. housing meltdown that are basically insurance policies against defaults.

The result: everyone takes a hit.

Mauldin went on to add:

I’m worried that this one has a lot of contagion and it will infect the world.

(Editor’s note: Italics added for emphasis)

The sovereign debt crisis doesn’t seem to be going away any time soon. Stay tuned…

Sources:

Petrakis, Maria. “Greek Debt Rating Is Cut to Caa1 From B1 by Moody’s.” Bloomberg.com. 2 June 2011. (http://www.bloomberg.com/news/2011-06-01/greece-cut-to-caa1-from-b1-by-moody-s-outlook-negative.html). 2 June 2011.

Jones, Forrest. “John Mauldin: Greek Default Would Threaten US.” Newsmax.com. 29 May 2011. (http://www.newsmax.com/Newsfront/Greece-Economy/2011/05/29/id/398142). 2 June 2011.

Tags: Greece, Greek bailout, Greek bonds, Greek debt crisis, John Mauldin, Moody's, sovereign debt crisis

Moody’s, Standard & Poor’s Warn About U.S. Credit Rating

Currently, Moody’s and Standard & Poor’s give the United States the highest possible credit rating. But that could change if America’s financial health continues to deteriorate. From the Wall Street Journal’s Nathalie Boschat, Mark Brown, and Mark Gongloff on January 14:

With attention focused on sovereign-debt worries in Europe, two major credit-rating firms reminded investors again that the U.S. has debt problems of its own…

Moody’s Investors Service said in a report on Thursday that the U.S. will need to reverse the expansion of its debt if it hopes to keep its “Aaa” rating.

“We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,” Sarah Carlson, senior analyst at Moody’s, said.

Separately, Carol Sirou, head of Standard & Poor’s France, told a Paris conference on Thursday that the firm couldn’t rule out lowering the outlook for the U.S. rating in the future.

“The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar” to fund its deficits, Ms. Sirou said. “But that may change.”

U.S. government debt has surged to an all-time high, topping $14 trillion, or $45,300 owed by each American.

Source:

Boschat, Nathalie, Brown, Mark, and Gongloff, Mark. “S&P, Moody’s Warn On U.S. Credit Rating.” Wall Street Journal. 14 Jan. 2011. (http://online.wsj.com/article/SB10001424052748703583404576079311379009904.html?mod=WSJ_WSJ_News_BlogsModule). 17 Jan. 2011.

Tags: credit rating, Moody's, national debt, Standard & Poor's