Credit crisis hits Main Street

Wilkes-Barre, which suffers from a weak BBB credit rating, depends on bond insurance to issue municipal bonds at favorable rates. If Ambac were to lose its AAA rating and its credibility, it could mean higher taxes, fewer services and lost jobs for the people of Wilkes-Barre.

"Without affordable funding, projects don't get built, streets don't get repaved," Leighton said.

"It affects the people driving on those roads and the people paving those roads."

The credit crisis that began in the subprime mortgage market last year has now spread to municipal bonds. Governments and public authorities face steep increases in borrowing costs because investors are losing confidence in the credit markets and the companies that insure the debt.

Public officials nationwide are now weighing whether to restructure their debt to lower rates - if they have good enough credit ratings - or to ride out the storm with the hope that investors will return. However, some are concerned they may have to raise taxes or cut services to balance their budgets.

This spike in borrowing costs comes at a time when governments can least afford it. Many are already facing a budget squeeze from the national economic downturn. The drop in housing prices and sales and increase in foreclosures mean they are taking in less revenue from transaction fees and property tax revenue. On top of that, the pullback in construction and consumer spending translates into fewer sales tax dollars.

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Because of the struggling bond market, municipal borrowing has become more expensive . This

problem will more than likely result in increased taxes and fewer services. Many larger governments have faced unexpected interest rate spikes when auctions of their debt drew no bidders. The interest rate on this debt is variable so it increased after the auctions failed. This lack of faith in the bond insurers is wreaking particular havoc on smaller and weaker municipalities as well. More money is being given toward interest expense, therefore, less is being allocated elsewhere. A solution to the problem may be to reduce the use of bond insurance.

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