At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.

An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.

Municipal debt including mortgage-backed bonds secured by the U.S. or agencies such as Fannie Mae and Freddie Mac, would be trimmed with the federal government, Moody’s said. It didn’t provide a total value for other state and local credits that may be affected, including housing authorities and nonprofits.

“Between now and the end of July, we’re going to evaluate all of those issuers using the same quantitative metrics that we have developed,” Naomi Richman, Moody’s managing director of public finance, said yesterday by telephone from New York about the indirectly linked securities.

“In the event that the U.S. government is downgraded, we won’t automatically downgrade those,” she said. “We’ll do a full review that we would normally do on a state rating.”

Moody’s put the U.S. rating under review as talks stalled in Washington on raising the government’s $14.3 trillion debt limit. Democrats including President Barack Obama want to raise taxes to curb the national deficit while congressional Republicans have sought deeper spending cuts.

Top Ratings

The company rates 15 states at Aaa. It also gives top marks to 440 local governments, 100 state housing bond programs, 43 higher-education and nonprofit institutions, a like number of state revolving-fund bond programs, and the Tennessee Valley Authority and the Bonneville Power Administration.

Issuers that are partially dependent on the federal government, such as states receiving Medicaid matching funds, also will be reviewed for vulnerability. Medicaid is a health- care program for the poor that is jointly funded by the states and the U.S. Moody’s said Aaa-rated states on average rely on the federal government for a quarter of total spending.

To contact the reporter on this story: James Nash in Sacramento at Jnash24@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

Original Source