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A comment from Mark McCray, a managing director who oversees about US$18 billion (Bt626 billion) in munici¬pal bonds at Pacific Investment Management, may best describe the situation. "The rating agencies have far less credibility than they had three years ago," he said.

Moody's Investors Service is about to tell as many as 29,000 US state and local government borrowers that they have higher credit ratings, although that doesn't mean taxpayers will enjoy lower bor¬rowing costs anytime soon.

Next month Moody's will start changing how it assesses taxexempt bonds, a move that will boost ratings by an average of one to two grades for cities and towns. Even with the expected increases, a taxexempt bor¬rower currently rated A is being charged an extra $6 million in annual interest to sell $1 billion of bonds, up from about $2 million a year ago, according to Lehman Brothers Holdings data.

Borrowers such as California that lobbied for the ratings changes may not get the sav¬ings it sought because Moody's may not go as far as to judge the debt by default risk alone. Also, the slowestgrowing economy since 2001 and a decline in the reliability of the ratings companies following the subprime crisis means the higher rankings may prove worthless to taxpayers.

The difference in borrowing costs for toprated debt on the current municipal grading scale and Arated taxexempt bonds in the $2.66trillion municipal market has widened, rather than narrowed, leading up to when the new higher ratings take effect. The socalled spread has expanded to an average 60 basis points this month, according to Lehman data. A basis point is 0.01 percentage point.

For about a century, Moody's used a separate rating scale for taxexempt bonds to serve groups of issuers, buyers and brokerdealers who typically operated independently from other capital markets, such as those for corporate and mortgage bonds. The municipal rat¬ings measure how close a borrower is to fiscal distress, while the global scale judges borrow¬ers on their default probability and loss given default.

Borrowers from California to Connecticut rebelled against the dual standard earlier this year. Insurance they felt compelled to buy to increase their ratings, even though issuers with Moody's investment grades have historically defaulted less than 0.1 per cent of the time, had backfired.