Federal Default Has Local Consequences

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    NEWSLETTERS

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    WASHINGTON, DC - JULY 28: Religious and civil leaders stage a civil disobedience protest relating to the debt limit impasse in the U.S. Capitol Rotunda July 28, 2011 in Washington, DC. The leaders, who were later arrested, called on Congress "to craft a budget that protects working Americans and requires millionaires and corporations to bear their fair share of the nation's tax burden." (Photo by Win McNamee/Getty Images)

    Some say all politics is local.

    Moody's Investor Services, one of the major firms that sets credit ratings, certainly thinks so.  Yesterday Moody's announced that if the federal government fails to come to an agreement August 2 and defaults on its debts, 162 local governments will get their credit downgraded - meaning their ability to raise money will become more expensive and more difficult.

    That sting will be felt acutely in Virginia and in some Maryland cities, where the federal government is a major mover in local economy.

    "The ratings of these local governments, particularly those with a high economic dependence on federal activity, would be vulnerable to a downgrade of the U.S. government,” said Moody's Senior Vice President Matt Jones in a statement. 

    A group of northern Virginia mayors protested the threatened rating change on Friday, and urged federal lawmakers to reach a deal on the debt ceiling.

    Mayors and County executives from Alexandria, Arlington, Fairfax City and County, Herndon, Loudoun, Prince William, and Vienna released a collective statement:

    "...any rating downgrade will increase the cost of borrowing for us all, forcing governments across Northern Virginia to reevaluate and perhaps curtail, capital spending.  The ripple effect of this situation on our local budgets could threaten basic services, just as we are slowly emerging from the multi-year, cyclical economic downturn."

    Even if the federal government does come to a debt ceiling compromise, a deal will include a reduction in federal spending.  Those decreased outflows could also have a negative affect on surrounding municipalities.

    As tensions mount, local lawmakers are starting to feel the heat.  In Rep. Eric Cantor's Virginia district, television spots have appeared telling voters to blame him if the country defaults.