Running out of other people’s money….

(Reuters) – Chicago drew closer to a fiscal free fall on Friday with a rating downgrade from Moody’s Investors Service that could trigger the immediate termination of four interest-rate swap agreements, costing the city about $58 million and raising the prospect of more broken swaps contracts.

The downgrade to Baa2, just two steps above junk, and a warning the rating could fall further still, means the third-biggest U.S. city could face even higher costs in the future if banks choose to terminate other interest-rate hedges against fluctuations in interest rates.

All told, Chicago holds swaps contracts covering $2.67 billion in debt, according to a disclosure late last year.

“This is an unfortunate wake-up call for anyone still asleep over the fiscal cliff facing the city of Chicago,” said Laurence Msall, president of the Chicago-based government finance watchdog, The Civic Federation. (read more)