October 16, 2003

Pittsburgh Debt Is Cut To Junk Status by S&P- WSJ

First Pittsburgh, what next? Today's WSJ reports that, "Standard & Poor's dropped its credit rating of Pittsburgh's municipal debt by five notches to junk status...The decision by S&P, announced Wednesday, affects about $879 million of Pittsburgh debt outstanding, all of which is insured, meaning any losses from a possible default would be born by insurance firms instead of investors." The article added that, "the action nevertheless made investors nervous as it was one of the sharpest downgrades of tax-exempt municipal debt since California's Orange County filed for bankruptcy protection in 1994." Nervous is just the beginning. Down right scared comes soon after. Of course there's a big difference between Pittsburgh and the United States government. But the dynamics of debt default are simple: if you borrow too much, sooner or later you're going to pay the price in either higher borrowing costs...or the downgrading of your outstanding debt. The article quoted Tom Metzold, a portfolio manager for Eaton Vance Corp., "We're talking about a major city going below investment grade." Yes indeed we are.


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