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July 26, 2011

DiNapoli Urges Resolution to Debt Ceiling Talks

Consensus Needed to Avert a Financial Crisis

State Comptroller Thomas P. DiNapoli urged a resolution to the stalled debt ceiling talks to avert a financial crisis that could have harmful ripple effects on New York's pension fund investments and state and local government bond ratings.

"New York State is just beginning to regain its financial strength, but the battle over the federal debt ceiling is creating tremendous uncertainty for the State's pension fund investments," DiNapoli said. "Beyond the impact on our pension fund, the failure to act in Washington could have other severe consequences in New York. The potential for higher borrowing costs, cash flow disruptions and a negative impact on bond markets at both the State and local levels are hanging like dark clouds over this debate in Washington.

"In the state capital and all across New York, budgets are really tight. What happens in Washington doesn't stay in Washington. There's a ripple effect. Changes in credit ratings and interest rates driven by Washington's stalemate can have a serious impact on the cost of bonding for capital projects. New Yorkers shouldn't have to pay more just because Washington can't do its job."

All three credit rating agencies have noted that the current situation presents significant uncertainty to the creditworthiness of the U.S. This could lead to a negative effect on Government Sponsored Enterprises (GSEs), including Fannie Mae and Freddie Mac, that are pivotal to the U.S. housing market, financial institutions, corporations and municipal credit ratings, including some AAA-rated states that could be immediately downgraded following a U.S. downgrade.

DiNapoli said a default or near-default on U.S. Treasuries, historically viewed as one of the world's safest assets, could lead to immediate and long-term damage, including higher borrowing costs for the U.S. and other municipal issuers as well as harming those who rely on Treasuries to secure their investments

DiNapoli also said lack of resolution by August 2 might force the postponement of payments on other U.S. obligations such as tax refunds, Social Security and Medicare payments, adding further stress to states and taxpayers, including senior citizens and members of the military whose federal payments are their primary source of income.

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