MIAMI BEACH, Fla. (Reuters) - Proposals for Wall Street ratings agencies to synchronize ratings for trillions of dollars of U.S. government debt with corporate ratings on Wednesday drew derision from municipal bond analysts.
Proponents of aligning ratings systems, including California's treasurer and finance giant Citigroup Inc (C.N: Quote, Profile, Research), argue that the change would stir global demand for municipal bonds and save taxpayers millions of dollars in interest payments.
Ratings from agencies such as Moody's Investors Service and Standard & Poor's are relied on by investors to gauge default and other risks and are key in determining interest rates paid on the $2.6 trillion of outstanding debt from cities, schools and other tax-free borrowers.
"You guys ever see the movie, 'Boiler Room'?," an audience member asked a panel of market experts at a meeting of municipal debt analysts, referring to a 2000 dramatic film about dishonest securities brokers bilking investors.
"You get two scales out there; you're going to hurt retail investors," the audience member said.
No one on the panel, including an official of the U.S. Securities and Exchange Commission, responded to the comments but many in the audience of hundreds at the annual meeting of the National Federation of Municipal Analysts applauded.
Other audience members speaking to the panel said the ratings proposals would aggravate confusion and anxiety in a market already dogged by wobbly bond insurers, complicated debt instruments that many say were far riskier than ratings agencies understood, and a defunct auction-rate securities segment.
"The last thing we need is to have lower standards," said another audience member. His comments, too, were applauded by others in the audience.
A third audience member asked whether or not municipal bond issuers, which are evaluated mostly on financial strength, and corporate bond sellers would be held to the same measures in a unified or aligned ratings system.
Corporate issuers are judged mostly on risk of default, according to advocates of the ratings change. Municipal debt issuers in the United States have very rarely defaulted and would presumably far well by that measure.
U.S. states, cities and agencies sell both tax-free and taxable debt, and overseas investors have flocked to the credits because they see them as semi-sovereign. Using one ratings system would be much simpler, advocates say.
On Tuesday, S&P defended its rating methodology and reaffirmed its commitment to a single rating scale for corporate, asset-backed, structured finance, government and U.S. municipal securities.
Moody's Investors Service has said it plans to start giving any, not just taxable municipal bonds, the same ratings it gives to companies upon an issuer's request.
Last month, a nearly $2.3 billion Connecticut taxable pension bond issue was priced after the deal got an "AAA" global scale rating from Moody's versus the state's "Aa3" rating. Almost 55 percent of the bonds were sold to investors in Europe, according to a state official.
Fitch Ratings has assigned a managing director to look into possible "harmonization" of corporate and public finance ratings.
(Additional reporting by Karen Pierog in Chicago; Editing by Diane Craft)
