ALBUQUERQUE, N.M. — Moody’s warned Tuesday it would likely cut its rating on New Mexico’s general obligation bonds a notch from its highest grade in the event that it downgrades its rating on federal government debt.
Moody’s said it is concerned that federal debt problems will hit New Mexico harder than some other states because of the large number of federal employees in New Mexico, the state’s reliance on federal Medicaid dollars and the importance of federal procurement contracts to the New Mexico economy.
The company also warned it might downgrade the AAA debt of Maryland, South Carolina, Tennessee and Virginia because of their exposure to federal budget problems.
New Mexico finance officials said it is impossible to know how a downgrade from AAA to AA-plus would affect the interest rates New Mexico will have to pay on future bond issues, but Board of Finance interim director Stephanie Schardin Clarke suggested the impact might not be significant.
“My thinking is that the market understands that bonds don’t get much safer than state of New Mexico general obligation and severance tax bonds,” Clarke said. “The debt service on these bonds is incredibly reliable. I think the market understands that and builds it into their pricing.”
Clarke added that, for the same reason, there was no noticeable improvement in the cost of New Mexico’s debt when it was upgraded to AAA in 2007.
The downgrade, should it occur, will have no effect on the interest on $355.5 million in general obligations bonds New Mexico has already issued. Clarke said the effect of the downgrade, if any, would show up in the state’s next general obligation bond issue, scheduled for 2013.
“We were not put on a credit watch due to anything New Mexico has done, just for the way New Mexico is,” said Spencer Wright, a portfolio manager in the State Treasurer’s Office. “The federal government plays a large role in the state. Moody’s did the right thing. If you put the federal government on credit watch, you need to look at what other entities might be affected.”