Key Point

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July 14, 2011 7:19 a.m.

We’ve written a lot about the enormous impact that a downgrade of U.S. government debt would have on the cost of borrowing, driving up interest rates and increasing the short-term budget deficit and long term debt account.

But as Bloomberg reports, the impact on non-federal governmental entities will be enormous, too. The credit rating firm Moody’s acknowledged as much yesterday when it put U.S. government debt on its watch list for possible downgrade.

Some 7,000 top-rated munis would be automatically downgraded if the U.S. government lost its AAA rating. In addition the credit ratings of a host of state and local governments, housing bond programs, higher education and non-profit institutions, and other entities dependent on the federal government would be reviewed, Bloomberg reports.

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