Fitch: Weaker Local Governments Vulnerable to Interest Rate Shock; States Fare Better

NEW YORK--()--Rising interest rates could hit financially vulnerable local governments hard, according to a Fitch Ratings report.

"Most local governments are still recovering from the lagged impact of the great recession, experiencing incremental improvement in state funding, moderate revenue recovery while facing continuing benefit pressures," said Olu Sonola, Senior Director and Head of Research in the U.S. Public Finance and Global Infrastructure Groups.

"The reality of an interest rate shock in the next year or two could lead to challenging financial operations and rating pressures for local governments whose reserve balances have not yet fully recovered."

The credit strength of most states would withstand an economic downturn induced by an interest rate shock. States generally have broad economies and tax bases with substantial control over revenue raising and spending. Most states should continue to support high ratings.

In a zero growth economy, induced by an interest rate shock, Fitch expects airport, port and toll road volumes would decline, with varying degrees of severity.

Fitch expects the Federal Reserve to start raising interest rates in mid-2015, before taking them to around 3.75% by late 2017 or early 2018.

This report is part of a series of research pieces that consider the potential impact of an unanticipated interest rate shock on sector performance.

For more information, a special report titled "US Interest Rate Shock" is available on the Fitch Ratings web site at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: U.S. Interest Rate Shock (Implications for States, Local Governments and Transportation)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=785770

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Contacts

Fitch Ratings
Olu Sonola, +1 212-908-0583
olu.sonola@fitchratings.com
or
Dan Champeau, +1 212-908-9188
daniel.champeau@fitchratings.com
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Olu Sonola, +1 212-908-0583
olu.sonola@fitchratings.com
or
Dan Champeau, +1 212-908-9188
daniel.champeau@fitchratings.com
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com