By Karen Pierog
DETROIT (Reuters) - Worries that Detroit's attempt to fix its enormous financial problems will be stymied by ongoing political turmoil are weighing on the debt-laden city's already low credit ratings.
Both Moody's Investors Service and Fitch Ratings pounded Detroit deeper into the junk category this week amid disputes over the pact city officials entered into with the state of Michigan in April.
Even though a Michigan judge on Wednesday dismissed an attempt by the city's top lawyer to invalidate the financial stability agreement, credit ratings agencies see a rocky road ahead for the Motor City.
In its downgrades of Detroit ratings on Thursday, Moody's cited "recent events that have highlighted risks associated with the city's illiquid cash position and lack of a clear political consensus to successfully implement the city's financial stability agreement."
Moody's rating cuts of Detroit's general obligation and other debt affect about $5.28 billion of debt.
While Moody's kept most of the city's ratings in the B category, Fitch on Tuesday slashed its ratings to the C level, meaning an increased chance of default.
Detroit officials earlier this week had projected the city could run out of money by Friday and could miss a $34.2 million payment on its pension obligation certificates of participation due that day.
However, the dismissal of the lawsuit cleared up a conflict with the state of Michigan that had caused a potential cash crunch and Mayor Dave Bing announced on Wednesday that the debt service payment will be made.
Fitch also noted the instability swirling around the city as well as uncertainly over the future of Michigan's 2011 emergency manager law, which it said forms the basis for several provisions in the city's financial stability agreement.
The placement on the November 6 Michigan ballot of a measure asking voters to repeal that law remains up in the air due to an ongoing court challenge.
Standard & Poor's Ratings Services, meanwhile, this week said it was keeping Detroit's GO ratings at B while it continues to monitor the situation.
While Bing and other city officials said they are moving forward in implementing the agreement, opposition lingers on the city council.
Three members of the council who voted against the agreement in April did not show up for a vote on Thursday to pick the council's two representatives on a financial advisory board that is part of the pact.
"On principle, they don't want to attend any meeting that has to do with the consent agreement," said Council President Charles Pugh.
He added, however, that the council would still strive to make the agreement work.
The nine-member board, which will oversee the city's budget, revenue and debt, has scheduled its first meeting for Friday.
This week's turmoil also led to the postponement of a $596 Detroit sewer revenue bond sale that had been slated to price in the U.S. municipal bond market.
Moody's on Thursday also cut the rating on Detroit's water and sewage senior lien and second lien debt by one notch to Baa2 and Baa3, respectively.
The ratings agency said the risk of a city bankruptcy filing "has incrementally increased in light of persistent liquidity pressures at the city level and ongoing political instability," and that there was uncertainty how the enterprise debt would be treated in such a filing.
Moody's said all the ratings remain under review pending the completion of the sale of bonds through the Michigan Finance Authority to raise $137 million for Detroit by restructuring some outstanding debt and issuing new debt to fund two years of self-insurance payments.
A spokesman for the Michigan Treasury Department said while the bond sale is expected to happen, there were no details about its timing.
(Reporting by Karen Pierog; Editing by Steve Orlofsky, Gary Crosse)