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State may benefit, if Moody's revises

June 13, 2008|Tom Petruno | Times Staff Writer

State Treasurer Bill Lockyer's campaign to get a AAA-credit rating for California is gaining traction.

Moody's Investors Service, one of the Big Three debt-rating firms, said Thursday that it planned to begin grading municipal bonds the same as it rates corporate and foreign sovereign debt.

That could lift the firm's rating on California's debt, which Moody's currently gives an A1 -- the lowest grade for any state other than Louisiana.

Lockyer and other state treasurers have for months been jawboning the credit-rating firms to change the way they judge the risks of tax-free municipal bonds.

The treasurer's argument long has been that there is no risk that California could default on its debt because the state Constitution mandates repayment. Given that, he says, the state should get an AAA rating.

Moody's and its rivals -- Standard & Poor's and Fitch Ratings -- have used other criteria to grade muni bonds, including issuers' ability to balance their budgets.

That's what accounts for California's low credit grade: The state has a history of busted budgets and borrowing to fund deficits. We're back in that soup now, facing a projected deficit of at least $15 billion in the new fiscal year.

Despite criticism that it was caving to political pressure, Moody's said it would move its muni ratings to a "global scale," meaning on par with how it judges companies and foreign nations. It will announce a timeline in July.

The credit-rating firms don't have a lot of friends in high places nowadays, given the high grades they gave hundreds of billions of dollars' worth of sub-prime mortgage debt that has since gone bad.

So Lockyer struck at a time when the companies were vulnerable. But he says the muni rating system has been patently unfair, dooming many issuers to less-than-top-level grades that then force them to pay high rates to borrow, or to buy private bond insurance.

Lockyer commended Moody's on Thursday and said he would "work to ensure the system Moody's adopts for taxpayer-backed bonds places primary emphasis on the risk of default."

It isn't clear whether S&P and Fitch will follow Moody's.

Whether a higher rating would save California much in interest costs remains to be seen. It's no secret to most big investors that there's no real risk of default on state debt. But in markets, perception can count as much as reality, and the state's ongoing budget woes don't paint a glowing picture of California as a debtor.

In the long run, though, a AAA rating would help the state attract new investors, including more small investors and foreigners, said Matt Fabian, an analyst at Municipal Market Advisors in Westport, Conn.

Rating muni, corporate and foreign bonds on one scale "would make it an easier comparison for investors," he said.

And for investors who already own California bonds, any upgrade would be a gift, of course -- and certainly better than a move in the other direction.


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