CHICAGO The credit ratings of all U.S. states could be endangered and many would likely be downgraded if the United States defaults on its debt, Standard & Poor's Ratings Services said on Thursday.
The rating agency, which placed the United States' triple-A rating on review for a possible downgrade last week, laid out a trio of hypothetical scenarios for the U.S. debt crisis and the potential impact on states, cities, schools and other issuers in the municipal bond market.
Under the worst-case scenario, the U.S. debt ceiling would not be raised by August 2 leading to a sharp reduction in federal spending, a default, higher interest rates and another economic downturn.
"Liquidity and market access would be a primary focus of our credit analysis, along with each government's ability to withstand the disruption in the credit markets and substantial losses in federal funding," S&P said, regarding state credits.
Cities, nonprofit hospitals, universities and others would also "share the pain" in terms of debt market problems and a drop in revenue, it added.
Even if an agreement is reached to raise the federal debt ceiling and slash spending, allowing the United States to retain its triple-A rating, S&P said it would continue to monitor states in areas such as Medicaid -- the federal health care program for the poor that accounts for as much as 30 percent of state spending.
However, S&P said the least disruptive scenario for muni issuers would be lifting the debt ceiling without addressing debt reduction.
"While the sovereign rating is lowered in this situation, the credit profiles of public finance issuers would remain relatively unscathed because there would be no dramatic changes in federal outlays," the rating agency said.
S&P reiterated its earlier warning that ratings on muni debt secured by or reliant on the U.S. government or federal securities would move in lock-step with the United States' rating. That includes defeased munis secured by U.S. Treasuries and U.S. agency securities.
(Reporting by Karen Pierog; Editing by James Dalgleish)