Bond insurers downgrades impact municipalities

Standard and Poor, via Calculated Risk, is trying to cover their own asses by starting to aggressively look into and cut back the credit ratings of major bond insurers. ACA Financial has been reduced to junk status, but the two companies that I am interested in are MBIA which has a negative outlook, and FGIC which now is being warned that it may be downgraded due to problems in its general portfolio.

These two firms have insured Pittsburgh's municipal debt, and if they are in trouble, Pittsburgh's mediocre credit rating will not provide any protection against potential interest rate increases and covenant violations. The Pittsburgh Post Gazette is finally publishing on this issue as they picked up an AP article on the problems municipalities may face due to this credit crunch:

S&P, in downgrading ACA and placing warnings on four other insurers, cited concerns about increasing claims from defaults on mortgage-backed bonds, and the risk that those claims could drain the bond insurers of needed capital...
The downgrade led S&P to cut ratings on bonds issued nationwide to fund projects such as schools, sewers, prisons and parks. The move could spark a municipal borrowing crisis, according to Peter Schiff, chief executive of Euro Pacific Capital.

"Many municipalities get high credit ratings because their bonds are insured," said Mr. Schiff. "Higher borrowing costs for cities will force them charge higher property taxes, which will increase the strain on consumers. And some cities may be shut out of the credit markets."....

Interesting times, very interesting times