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In its first-ever assignment of a sector-wide outlook for US local government ratings, Moody’s gives a negative outlook for the sector over the next 12 to 18 months. While it does not address local governments individually, it does imply increasing downgrades and possibly defaults by individual municipal debt issuers. Local governments with above average exposure to real estate, auto and financial services industries “could well experience significant downward rating pressure in the near-term.”

The real estate development slowdown could impact areas with recent high growth levels such as certain areas of Florida and California. Troubles in the auto manufacturing industry may well affect many governments in Michigan, Indiana and Ohio, while the turmoil in the financial services industry is affecting issuers in New York, New Jersey and Connecticut. Tourism, gaming, and manufacturing generally, may also be disproportionately affected by the current downturn. Local governments with above average exposure to these particular industries could well experience significant downward rating pressure in the near-term.

The negative outlook “reflects the significant fiscal challenges local governments face as a result of the housing market collapse, dislocations in the financial markets, and a recession that is broader and deeper than any recent downturn.”

With the past year’s relentless stream of negative economic and financial news, the current economic environment will clearly pose significant challenges for many if not most local governments. Sharply falling property values, contracting consumer spending, job losses, and limited credit availability lead the long list of developments that will make balancing budgets in the coming year particularly difficult.

The negative outlook assigned to the U.S. local government sector encapsulates our view of this challenging environment and the strains that will be evident in credit for issuers across the industry.

The negative sector outlook does not suggest that the prospects for local government credit ratings are uniformly negative. Its meaning is distinct from our rating outlooks for individual credits, which are predictive of future rating direction for that particular credit.

Credit pressures faced by local governments and their responses to these pressures will vary significantly across and within states due to uneven economic conditions, differing revenue mixes and service mandates, inconsistent property assessment practices, and different levels of revenue raising authority. The governance strength of individual issuers and the behaviors which demonstrate their willingness and ability to adapt to that environment will determine the overall trend in individual ratings.

For details see: Moody’s Assigns Negative Outlook to U.S. Local Government Sector.

Source: Moody's Negative Outlook Implies Local Government Defaults