The United States is exactly one week away from a possible default, but the already struggling municipal markets are feeling the pain, Bernard Beal, CEO of M.R. Beal & Company, told CNBC Tuesday.
"The municipalities are so dependent on federal transfer payments that they've had to adjust," said Beal said, whose minority-owned investment banking firm focuses on underwriting muni deals.
It is that uncertainty that is causing a problem, and what has "caused Moody's to say they're looking at all 15 triple-A states for a possible downgrade in the event of a federal downgrade," he added.
For example, Maryland on Monday pulled a transaction of about $300 million because "they did not know whether they were going to be a triple-A credit or double-A credit, and the potential (this was a refunding deal) rate that they would have had to pay meant reduced savings," Beal went on to say.
A muni credit downgrade, he explained, would result in increased borrowing costs for each of those 15 triple-A states and would trickle down to the localities, and trickle down to the individual small businesses.
"States, unlike the federal government, have to have balance budgets by the Constitution," with the exception of Vermont, added Beal.
Lastly, the federal government often issues what are called "slugs," or state and local government securities, through the Treasury Department. State and local governments require these securities to fund their debt and it makes the debt work more efficiently.
"Whenever we've come up against a debt ceiling, one of the first things the government does is close the slug window. It's been closed since May 6. It makes it very difficult for municipal governments to refinance their debt. It means their cost of refinancing goes up," Beal said.
Although he "doubts" there will be a permanent solution to the debt ceiling issue, Beal hopes we'll get more than a "short-term band-aid fix."