Moody's Investors Service has cut ratings on US$64 billion of US municipal bonds that rely on letters of credit (L/Cs) and other instruments issued by institutions the ratings agency has recently downgraded.

The bonds include debt owed by 1,675 US local and state governments, because the obligations rely on more than a dozen global banks the ratings agency reckons are less secure than they were.

Recent downgrades

Moody's recently downgraded 15 large financial institutions that provided L/Cs, standby bond purchase agreements and other liquidity facilities in the municipal bond market.

They include Citigroup, Goldman Sachs, Credit Agricole Corporate & Investment Bank, JPMorgan Chase, Morgan Stanley, Royal Bank of Canada and Societe Generale.

Limited impact

However, Moody's said it expects the downgrades to have a limited impact on long-term bond ratings of variable rate securities issued by the US public sector.

Some 500 municipal issuers have outstanding variable rate demand bonds backed by L/Cs or standby bond purchase agreements issued by the downgraded institutions.

The New York based ratings agency reckons fewer than 5 per cent of these may be affected.

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