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States ‘Can Ill Afford’ Debt Default, Governors Chief Says

July 15 (Bloomberg) -- U.S. states “can ill afford” a federal government default if talks in Washington fail to raise the nation’s debt ceiling, the chair of the National Governors Association said.

States “are in a fragile state of recovery” and the debt-ceiling debate is undermining consumer and business confidence, Washington Governor Christine Gregoire said today at a conference attended by 32 state leaders in Salt Lake City, Utah.

“It’s time to put this issue behind us and get on with the issue confronting every American, which is, ‘Do I have a job and will I have a job tomorrow,’” Gregoire, a second-term Democrat, said in a press conference.

President Barack Obama and Republicans in Congress are attempting to work out an agreement to boost the legal debt ceiling. The Treasury Department has said the U.S. will reach the limit of its borrowing authority on Aug. 2.

Unless the debt limit is raised, the Treasury would have to cut about $134 billion in spending during August, according to a report by the Washington-based Bipartisan Policy Center. The cuts might imperil funds flowing to the states for such things as transportation and Medicaid, the joint federal-state health program for the poor.

Unsettled financial markets could also push up borrowing costs for municipalities should Treasury bonds, which set the baseline for other securities, tumble.

‘So Much Uncertainty’

“There is so much uncertainty,” Delaware Governor Jack Markell, a Democrat, said in an interview with Megan Hughes on Bloomberg Television. “If things fall apart and it leads to a significant interest-rate increase, that would be a problem.”

“If it jacks up the interest rate we have to pay if we sell additional bonds, that’s a problem,” he said.

Should the U.S. government loses its top Aaa credit rating following a default, at least 7,000 top-rated municipal credits would have their ratings cut, Moody’s Investors Service said in a report this week. Top-rated securities with no direct links to the national government would also be reviewed for similar action, the New York-based company said.

An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would follow any reduction in the federal level, Moody’s said.

Moody’s gives 15 states an Aaa grade, along with 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.

To contact the reporter on this story: Tim Jones in Salt Lake City at tjones58@bloomberg.net

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

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