At best ratings agencies are pressured by politicians to give local governments higher grades so that they may qualify for cheaper refinancing. At worst there is blatant lying or obfuscation of the off balance sheet fiscal weakness of these governments. Why?
Because state governments are run on politically necessary but fiscally unviable promises to select voter groups. The same situation exists at the federal level but Treasuries remain protected by large global actors such as the entire Far East, Middle East, and even the US' own Treasury purchases.
In 1929, more than 98 percent of the largest U.S. cities were rated Aa or better, according to Ciccarone’s research, which cites a study of municipal bonds showing that 3,252 issues went into default at the peak of the economic contraction in 1935. Almost half the bonds in default were rated Aaa in 1929.
“We may be facing the same conditions today that we did in the 1930s, but they could be worse because of pension and other liabilities,” Ciccarone said. “We have some huge liabilities at the same time that real estate values are falling.”http://www.bloomberg.com/apps/