Will County Treasurer Steve Weber provides the first (as far as I know) clear, nuts and bolts explanation of what will happen to county and local governments in Will County if the federal government defaults or it suffers a credit rating reduction.
One of the eye-opening facts is what is called the sovereign ceiling rule. From Weber's White Paper:
According to the world’s largest and most prominent asset manager, BlackRock (BLK 186.49 ↓-0.76%), a downgrading of US debt will cause several unintended consequences. The most important to Will County (and other local government) is a concept in finance called the ‘sovereign ceiling rule.’
The sovereign ceiling rule says that, with few exceptions, the private sector cannot have a higher credit rating than the government. This follows the fact that the S&P said they would downgrade other AAA-rated companies such as Fannie Mae (FNMA 0.34 ↓-0.29%) and US insurance agencies.
The sovereign ceiling rule also can apply to municipal bond issuers, such as Will County.”
Hardly seems fair or understandable. But when it comes to high finance, what is fair or understandable.