Moody's to Rerate Munis

Laura Levenstein of Moody's says that she's going to start rating munis on the same scale as corporates. Alistair Barr reports:

"Moody's recognizes that the municipal bond market has evolved, and with it we have taken steps to respond to the changing needs of investors and issuers," she said in prepared testimony to a congressional committee on Wednesday.
Moody's and other agencies currently use one system for rating muni bonds and another for companies, sovereign issuers and structured finance. However, recent studies have shown that muni bonds default less than corporate bonds and much less than structured securities such as Collateralized Debt Obligations. The mortgage crisis has shed harsh light on such differences.
The different scales mean that it's more difficult for municipalities to get an AAA rating. Rating them in the same way as corporations and countries will likely mean a lot of muni bonds will probably be upgraded.

I'm not clear what Barr means here by "other agencies"; S&P has said that it only has one ratings scale. But if Moody's upgrades a lot of munis, then there will be some big discrepancies between the Moody's and S&P ratings, which currently tend to be identical or at least within a notch of each other.

Of course, in taking this action Moody's risks upgrading a large number of bonds just as their risk of default is rising. Let's hope they don't end up with even more egg on their face than they have already.

(Thanks to Jesse Eisinger for the tip.)