November 7, 2007 (LPAC)--Fitch Ratings has threatened to downgrade a group of U.S. bond insurance companies, which may "set off a fresh credit crisis and cause contagion across America's $2,400 billion municipal bond market," reports the London Daily Telegraph today.

The warnings of downgradings concerned insurers, CIFG Guaranty, Financial Guaranty Insurance Company, Ambac Assurance, and Security Capital. These are the so-called "monoliners" whose insurance helps junk paper get triple-A ratings. These insurers are guaranteeing debt with "leverage" of up to 150 times.

The problem is that these companies are key insurers of municipal bonds, so if their ratings go down, so do the ratings of the municipal bonds they insure. The Telegraph's Ambrose Evans Pritchard quotes one municipal bond market adviser, that any down grading of these insurers would be a "crushing blow" to the municipal bond market. "I have never seen a crisis of confidence in the insurers like this before," he said.

While the bad debt damaging these insurers is mostly subprime backed securities, especially collateralized debt obligations, it is enough to "poison the vast pool of muni bonds that they insure."