A savvy and cynical reader sent me this story from the Boston Globe yesterday, “Rating agency downbeat on Mass. communities.” We wanted to show readers that we are not merely after Standard & Poor’s but all sorts of rating agency incompetence and socially destructive behavior. Key extracts:
Moody’s Investors Service has assigned a “negative outlook’’ to the credit ratings of a dozen affluent Massachusetts communities and two regional school districts, in an ominous sign of how the national debt crisis and economy woes threaten the financial health of cities and towns.
The communities, which ranked among the state’s wealthiest, maintained their sterling AAA credit ratings for now, but Moody’s said it would be carefully watching them for signs they should be downgraded, signs like a sharply deteriorating national economy or a downgrade in the federal debt.
The Moody’s review, which put five states and 161 AAA-rated local governments on the negative-outlook watch list, found that Massachusetts was second only to Virginia in the number of communities at risk, largely because both states’ economies are highly dependent on federal spending….
“We’re obviously very concerned about it,’’ said Brookline’s town administrator, Melvin Kleckner.
Other communities that received a negative outlook are Acton, Bedford, Belmont, Concord, Dover, Hingham, Lexington, Newton, Wayland, Wellesley, and Weston.
Now this might sound perfectly sensible until you sit back and think a second.
First, I don’t know all these communities, but I lived in Boston eight years (including first and second grade in Newton Center), and I am pretty confident that the economies of Belmont, Brookline, Newton, Wellesley and Weston are not at all dependent on federal spending, and I suspect that applies to some of the other municipalities on the list. In addition, they are the most affluent communities in the state and among the wealthiest communities in the US. They are likely to hold up well if and when the downturn resumes (after all, they were not badly whacked by the crisis).
Second, the Massachusetts economy has done better than the national average.
Third, if you are gonna put communities on downgrade watch, why are you starting with the strongest ones? You start with the weakest ones. Not only is it true in economies (and in other systems) that the most fragile ones fall over first, in bond markets, the spreads of the riskiest instruments blow out first, and the highest rated credits move later, and not as much. So if the rating agencies were following their usual pattern of validating market action rather than leading it, Moody’s again would focus on the most troubled towns. Some do have serious financial issues and do deserve heightened scrutiny.
My friend’s surmise:
I consider this to be extremely weird behavior. They don’t downgrade them, but they send up a flare. My suspicion is that the agencies are going under the radar into the states (where the national press won’t notice) and stirring up panic, with the obvious aim of bolstering support for budget cuts.
This may sound a tad paranoid, but as Thomas Pynchon says, just because you are paranoid does not mean they are not out to get you. Affluent communities have a lot of investors, including muni investors, who may lose personally if local bonds are downgraded. And in general, people in very affluent communities are much more active and influential politically than most citizens. So this threatened action hits individuals who have a disproportionately large voice in politics and the media. Nicely done.
Consistent with this alert, S&P follows through tonight with its own muni gloomster talk, again threatening local communities with downgrades if the US does not enact the strongest form of budget cuts. And we get similar scare-mongering generalizations: ” “We know the states that are reliant on the federal government, we know the locals that are reliant on the federal government.” That is true in quite a few cases, but it certainly is not true across the board, and is least true in the most affluent communities.
I’d love any reader reports on which communities in Virginia were threatened with ratings actions and whether any other wealthy communities in the US have been put on notice. And if your town has been given an alert, do you buy the link to the Federal downgrade? Does the local economy as having meaningful dependence on Federal funding?