NEW YORK - A major insurer of bonds was downgraded to "junk" status yesterday, a move that could potentially cost banks and local governments billions of dollars.
Credit rating agency Standard & Poor's slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a noninvestment grade "CCC" from investment grade "A."
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 agency also acknowledged its actions could change the way bond insurers do business.
The downgrade led S&P to cut ratings on bonds issued nationwide to fund everything from schools to sewers and prisons to 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 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."
The new strain on civic funding comes at the same time that plummeting home sales and values and rising mortgage defaults threaten to drain local coffers of property taxes. Many cities have been banking on higher property taxes, but now homes are being valued lower and this also reduces funds available to the cities, he said.
Many of the municipal bonds downgraded by S&P were cut below the underlying rating of the municipality. The reason, said Axel Merk, manager of the Merk Hard Currency fund, is because bonds can be linked to specific projects or future revenue streams.