NEW YORK A major insurer of bonds was downgraded to "junk" status on Wednesday, a move that could potentially cost banks and local governments billions of dollars.
Credit rating agency Standard & Poor's slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade "CCC" from investment grade "A." S&P said ACA's capital cushion of $650 million is still $2.2 billion short of what it needs to cover potential losses.
S&P, in downgrading ACA and placing warnings on four other insurers, cited concerns about increasing claims from defaults on mortgage-backed bonds, and the risk that those claims could drain the bond insurers of needed capital. The agency also acknowledged its actions could change the way bond insurers do business from now on.
The downgrade led S&P to cut ratings on bonds issued to fund everything from schools to sewers and prisons to parks. The move makes it unlikely ACA could insure any more bonds and could spark a municipal borrowing crisis, according to Peter Schiff, chief executive of Euro Pacific Capital.