UPDATE 1-US budget cuts to hit public issuer credit quality -Moody's

Thu Feb 28, 2013 5:15pm EST

Feb 28 (Reuters) - Automatic federal spending cuts known as sequestration are likely to go into effect on March 1 and will be a credit negative for U.S. public issuers, Moody's Investors Service said on Thursday.

The negative impact on credit quality would be felt gradually, as $1.2 trillion in reductions are phased in over 10 years, Moody's said.

Many state and local governments rely on sales taxes and other income that is sensitive to economic downturns, leaving them to feel the pinch of sequestration through lowered federal government purchases and lower federal employee and contractor incomes, Moody's said.

Issuers with high concentrations of defense employment and procurement operations would be especially affected, according to the credit rating agency.

Non-profit hospitals would also be impacted as Medicare reimbursement rates are lowered by 2 percent. Universities that rely on federal research grants would see an 8 percent cut in grants, though most have the ability to slow research spending.

Federal rental subsidies for affordable apartment projects would also be affected, Moody's said.

Earlier on Thursday, Standard & Poor's Ratings Services was less concerned, saying that the spending cuts may have only a minor negative impact for local governments.

That is because most municipalities since the beginning of the recession have shown willingness to impose cutbacks in response to weaker revenue, S&P said.

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