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 This is an enormous disappointment… Moody’s and Fitch are delaying the standardization of the corporate and municipal rating scales… the rational is the stressed condition of the muni market… errr… rater people… all the fixed income markets are stressed now…

It would seem it would actually help markets allocate capital more efficiently to have the scales comparable… since dealers aren’t so active making markets being able to price securities across asset classes with the credit quality standardized would be a big help…

Changes to U.S. muni ratings system delayed…  

WASHINGTON, Oct 7 - Reuters… Two major U.S. credit ratings agencies on Tuesday delayed changes to how they assess municipal debt because of troubled market conditions caused by the credit crisis.

Moody’s Investor Services and Fitch Ratings, part of Fimalac SA, had both announced plans to rate municipal bonds on the same scale as corporate debt after pressure grew from states such as California and the U.S. Congress to reflect public debt’s relatively low default rate in their gradings.

“While Moody’s remains committed to ensuring that our U.S. public finance ratings are comparable to ratings in other sectors, we are sensitive to introducing a recalibration in the midst of current credit market turmoil,” said Gail Sussman, group managing director for U.S. public finance at Moody’s.

Fitch also cited “recent extraordinary turmoil in the global financial markets” for its decision to defer harmonizing the ratings. The agency said the trouble in markets has had an impact on the credit quality of U.S. municipal issuers.

For the last few weeks, the municipal bond market has been completely frozen, with cities and states unable to issue new debt. Fitch said it is concerned that “impaired market access adds a degree of volatility.”

While Moody’s postponed its changes indefinitely, Fitch said the changes were only delayed until some time in the first quarter of next year.

“Fitch plans to recalibrate its municipal ratings,” Robert Grossman, group managing director of public finance told Reuters in an e-mail. “We will be studying whether constrained market access and the associated market turmoil have an impact on municipal credit quality overall, or for any particular subgroup.”

Both agencies had said many municipal bonds would receive higher ratings on their new scales, noting the default rate for public debt is much smaller than that for private debt.

Fitch had released some preliminary ratings revisions under its proposed system, but Grossman did not say what would happen to those assessments.

Moody’s was set to begin releasing new ratings on some representative bond issues this month and complete its change some time in January.

Last summer, the U.S. House of Representatives Financial Services Committee passed a bill mandating the three major agencies, which also includes Standard & Poor’s Ratings Services, a part of McGraw-Hill Co, use a single scale. That bill has yet to be taken up by the entire legislative body.

S&P has said it already uses a single scale.

At the same time, California agitated for a single scale, saying that lower ratings drive up debt costs for issuers.

“Good move by Fitch and then Moody’s,” said analyst Richard Ciccarone from McDonnell Investment Management, LLC. “Wrong time, if at all, for making such a change.”

Ciccarone has contended that the proposed changes relied on historic models that reached back to the 1980′s, when they should have taken into account the Great Depression. Many bond issuers with high ratings defaulted or went bankrupt during the largest U.S. economic downturn of the 20th century, he said. That prompted the agencies to make their rating criteria stricter.

“You look at the conditions today, they are worse than when we were going into the Depression,” he said of U.S. cities and states. Most are grappling with rising labor costs and obligations to pay for items such as pensions, while the housing market downturn has stunted property tax collection.

He pointed out that not all municipalities went bankrupt in the Great Depression, and not all were on the verge of defaulting on bonds now. Still, he said, keeping the current rating system would help investors distinguish between risky and safe municipal debt.

Prior to last winter, municipal bond issuers typically bought bond insurance from bond insurers who enjoyed triple-A ratings, lowering their debt costs and making them eligible for purchase by money market funds.

When the bond insurers ratings were lowered last winter, the issuers were forced to trade on their own underlying ratings. (Additional reporting by Karen Pierog; Editing by Leslie Adler)