Connecticut Sues Ratings Agencies

Unhappy with its bond rating, the state of Connecticut has chosen to sue the credit -ratings agencies.

Attorney General Richard Blumenthal alleges the agencies intentionally gave lower ratings than the state deserved, which resulted in higher costs for taxpayers.

Moody's(MCO Quote), McGraw-Hill's (MHP Quote)Standard & Poor's unit and Fitch were all named in the suit. Blumenthal believes the low ratings caused the state's municipalities to purchase bond insurance, which wouldn't have been needed if the ratings were higher.

Standard & Poor's said in a statement that the lawsuit "is simply a case of a state attempting to use litigation to dictate what bond rating it receives." Blumenthal insisted on CNBC that Connecticut had no history of ever having a problem paying off its debt and that the ratings should be based on the ability to repay the debt on time. He stated that public bonds default at rates far lower than corporate bonds.

For its part Fitch said it rates Connecticut and all states "based on our forward-looking opinion as to their financial capacity to pay their debts as they come due -- not based solely on historical rates of default."

Municipalities have groused for years about having to pay for ratings. But many mutual funds can't purchase unrated bonds, and brokers have a hard time convincing customers to buy them. Plus, the municipalities have to pay for insurance if the bonds are unrated, which usually costs more than the rating fee itself.