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To see the impact of credit market strain in the United States one need not travel farther west than The Bay State.

On Tuesday, Massachusetts, which would rank in the top 100 countries in the world in terms of GDP if ranked as a nation, postponed the sale of $750 million in short-term notes for the second time in two weeks, due to a lack of demand.

However, it should be pointed out that Massachusetts's decision occurred before the U.S. Federal Reserve's decision, announced Tuesday at 9 a.m. EDT, to buy all corporate commercial paper to ease tight credit markets.

Further, although the municipal market differs from the corporate commercial paper market, the Fed's action aimed at easing conditions in the credit market overall, via both guaranteeing debt payment and by moral suasion. Many economists see this as the Fed's attempt to change market psychology via the central bank's enormous financial resources, monetary policy stance, and regulatory powers.

Still, economists caution that the Fed's commercial paper guarantee does not end counterparty risk; it simply eliminates a segment of that counterparty risk. According to economist David H. Wang, more actions by the Fed and U.S. Treasury undoubtedly will be needed to get credit flowing more freely and also reduce perhaps the biggest systemic problem: fear. Commercial paper is about a $1.5 trillion market, while states and local governments borrow about $2.8 trillion, Wang said.

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Massachusetts postpones $750 million short-term debt sale due to credit crunch originally appeared on BloggingStocks on Tue, 07 Oct 2008 14:45:00 EST. Please see our terms for use of feeds.

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