The future of Maryland’s sterling credit rating hung in doubt Monday evening after the downgrade of the nation’s debt whipped investors into a panic and pushed the stock market into a free fall.
The months-long stalemate on Capitol Hill that led to that first decrease in the country’s creditworthiness rating prompted worry about the willingness — and ability — of Congress to help pay for Maryland projects like the Red Line light rail system.
A similar credit downgrade for Maryland could cost the state millions of dollars a year in higher interest payments.
“Unfortunately, it’s clearly a possibility,” said Comptroller Peter Franchot, the state’s tax collector. “We need to be very cautious about the state’s credit card.”
Officials in the governor’s and treasurer’s offices said early Monday evening they had not discussed the state’s rating with Standard & Poor’s, the firm that downgraded U.S. credit to AA+ from AAA on Friday and warned of more widespread adjustments this week.
But late Monday, an S&P spokesman declined to say when state rating announcements would come.
S&P and the two other top rating agencies — Moody’s Investors Service and Fitch Ratings — confirmed the state’s AAA rating in July as the state readied a $512 million bond sale.
Moody’s confirmed that rating again last week, but changed the outlook to “negative.”
“Within the next few months they will come back to every state that got the negative outlook,” said Patti Konrad, director of debt management in the State Treasurer’s office.
Any change would only affect future debt. The state’s next bond sale is scheduled for February, although the treasurer could decide to refinance existing debt if interest rates are low enough.
A one-notch drop in Maryland’s rating would increase the cost of new state debt by about $1 million per year for every $100 million borrowed, according to Warren Deschenaux, the legislature’s top budget analyst.
Those costs could ripple out from the State House, increasing borrowing costs for cities, counties, transportation projects, the Maryland Stadium Authority and even the purchase of slot machines.
According to the Maryland Municipal League, the state issues bonds on behalf of all but a handful of cities through the Local Government Infrastructure Financing program.
The largest transportation project in the works is Baltimore’s Red Line. The federal and state government are expected to split the $2.2 billion price tag. But, Donald C. Fry, president and CEO of the Greater Baltimore Committee, said the performance of Congress in recent months could delay or even derail federal funding.
“The downgrade, as S&P is stating, is based upon the dysfunction of the federal government to address some very serious financial challenges in a reasonable and timely fashion,” he said. “If we have the same sort of approach that’s taken it’s going to be very difficult to get [the rail projects] moving forward.”
The Maryland Department of Transportation does not expect to seek federal money for at least a year, and construction, the most costly phase, wouldn’t start until at least 2015.
“We’re certainly monitoring where Congress goes from here,” said Jack Cahalan, a department spokesman. “We’re attempting to quantify the potential hit to our federal programs. But the landscape is still covered in fog.”
Deschenaux said the way the economy responds to the shakeup caused by the U.S. downgrade will in large part determine what happens to the state’s rating. A weaker economy coupled with lower federal spending would make the state pick up a larger share of the tab for services it provides and less revenue with which to do so.
“The fact that one agency downgraded the U.S. credit doesn’t say a whole lot about Maryland’s financial position,” he said. “It’s the response to that change that matters.”
Anirban Basu, chairman and CEO of Sage Policy Group Inc., put the chances of the country slipping back into a recession at more than 50 percent and said industrial production and consumer spending in August and September will give a good indication of which way the economy is heading.
“The U.S. economy had been so fragile in the beginning of the year. I can’t see it being able to take on all this additional weight,” Basu said.
The Dow Jones Industrial Average lost 5.55 percent of its value, slipping 635 points to finish the day at 10,810. The S&P 500 lost 6.66 percent.
While fleeing the stock market investors sought safer places to park their money, including gold, which finished the day at $1,718 an ounce and, ironically, the U.S. Treasury bonds that S&P downgraded. The interest rate on treasuries sank to 2.34 percent on the strong demand.
“It’s a lot of speculation and it’s getting priced into the market relatively quickly. Right now it seems as we’re just in full-blown panic mode,” said Wayne Lin, a Legg Mason analyst. “There’s nothing that I see in the fundamentals that would justify this kind of downdraft in equities.”
Lin said with inaction likely from Congress, the onus will fall on Federal Reserve Chairman Ben Bernanke to stabilize the topsy-turvy economy.
“This thing could all sort itself out, but it just doesn’t feel that way,” he said. “It feels like the American public is involved in this. I think they’re signaling through the stock market with what is basically a no-confidence vote.”