U.S. muni market assesses Fed's lifeline for cash-strapped states, cities

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The Federal Reserve broadened the universe of states and local governments that can tap into a new $500 billion borrowing program for cash needed in the wake of the coronavirus outbreak, but certain newly disclosed requirements may shut some out, municipal market analysts said on Tuesday.

FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 27, 2019. REUTERS/Brendan McDermid

With the flow of more federal money uncertain, cities, states and counties facing deep revenue losses from the economic fallout of shutdowns aimed at curbing the spread of the novel coronavirus may need to borrow to keep their governments operating. “Clearly, the way it’s written will hamper participation,” said Mikhail Foux, head of municipal strategy at Barclays, adding that the program will “effectively be used as a backstop unless the language is changed.”

As for the cost of borrowing under the yet-to-be-launched program, the Fed said it will establish a pricing methodology based on an issuer’s long-term rating and the maturity of its notes, plus a spread over an existing benchmark or index.

 

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