Citing Federal Debt, Moody's Warns Five States

Five states could see their top credit ratings downgraded because of the political impasse over debt in Washington, D.C., Moody's Investors Service announced on Tuesday (July 19).

The credit ratings agency said Maryland, New Mexico, South Carolina, Tennessee and Virginia all could be downgraded from their prized AAA credit rating if the federal government does not raise its debt ceiling within the next few weeks. Though 15 states overall have the top credit rating, Moody's said these five states depend more heavily than the others on federal spending or borrowing, and therefore are more vulnerable to sudden changes in economic confidence.

State officials were not pleased by the announcement, saying state governments are being dragged into a mess created by Congress and President Obama.

"We're furious," said Republican Governor Robert McDonnell of Virginia , which, like Maryland, receives a much higher share of federal spending than most other states because of its proximity to the nation's capital. McDonnell announced Tuesday that Virginia has a $311 million budget surplus from the fiscal year that just ended, but the good news was tempered by the grim assessment from Moody's. Virginia has had the highest possible credit rating since 1938, McDonnell noted.

In Maryland, the Moody's warning "threatened to affect the interest rates that large institutional investors would offer next week in a scheduled sale of about $500 million in bonds for construction of schools, prisons and other public works," The Washington Post reported . "Technically, those bonds will retain a triple-A rating, but state fiscal experts said the outcome was unclear because at no time in recent memory has the state conducted a bond sale while under a credit watch."

State leaders elsewhere also were turning up the heat on federal officials to reach a deal. Governor Jack Markell and U.S. Senator Chris Coons of Delaware, both Democrats, were among those outlining how a federal default could harm their state, The News Journal of Wilmington reported , noting that higher interest rates soon could be demanded for borrowing money.