NEW YORK - Exacerbated by the economic crisis, the credit market and interest rate environment of the past two years has highlighted the cash flow and liquidity risks faced by U.S. state and local governments that issue variable rate debt and enter into swap agreements, says Moody's Investors Service in a new report.
"The market turmoil of the past two years has increased the potential risks of variable rate debt and interest rate swaps for governments but most have thus far managed these risks without adversely impacting credit quality," said Moody's Assistant Vice President Rachel Cortez, author of the report, which describes how Moody's measures exposure to risk and the factors that limit an issuer's vulnerability.
Moody's analysis focuses on interest rate risk, basis risk, liquidity facility term out risk, rollover risk, risks associated with swap termination and collateral posting, amortization risk, and counterparty risk.
"The use of variable rate debt and swaps puts issuers at risk for potential cash flow and liquidity pressures," said Cortez. "These once-hypothetical risks have recently been realized for some, causing unprecedented financial stress."
She said Moody's Public Finance Group will continue to assess the risks, especially because the potential costs and benefits of variable rate debt and swaps are both key components of a municipal issuer's rating.
