California's Ratings Downgrade Sparks Municipality Madness

Think of it as a muni Mardi Gras: California’s debt is now rated lower than Louisiana.

Thanks to a budget crisis, Standard & Poor’s (which like BusinessWeek, is owned by McGraw-Hill) cut California’s credit rating to A from A+ on Feb. 2. As a result, California is now the largest tax-exempt borrower in the lowest-rated state, behind Louisiana.

What does that mean for municipal bond investors? The implications aren’t dire, according to Tom Petruno in the Los Angeles Times.

“…Debt ratings are relative. Being at the bottom with an “A” grade doesn’t mean that S&P believes California is in danger of reneging on its debts. In fact, the state Constitution mandates that the state must repay its bondholders…But if there’s really no default risk, why should California be rated much differently than, say, Georgia, which has a grade of “AAA” from S&P?

Good question, Tom. Readers, what do you think?

Before it's here, it's on the Bloomberg Terminal.