Moody’s expects to downgrade five states if the debt ceiling isn’t raised. How these states — most led by Republicans — became totally dependent on federal dollars.

TN_FlagTensions are boiling over in Washington as U.S. lawmakers negotiate a plan to raise the $14.3 trillion debt limit. With an Aug. 2 deadline fast approaching, the U.S. government is nowhere close to forging a deal — an impasse that puts its impeccable triple-A rating at risk.

A downgrade would be bad news for the overall economy on various levels. Much attention has focused on how it could impact consumers: Interest rates for U.S. Treasury bonds would rise, which would lead to higher borrowing costs for everything from home mortgages to car and school loans. And with a fragile economy still slowly recovering from a deep recession, such shocks to the market could send the U.S. back into a downturn.

What has been less talked about is what a downgrade would mean to individual states.

Last week, Moody’s Investor Services placed Maryland, New Mexico, South Carolina, Tennessee and Virginia under watch for a possible downgrade. The five are among the 15 states currently with stellar triple-A credit ratings. Moody’s placed the group of five under watch because of their relatively large exposure to federal funding – from Medicaid payments to government contracts and the like. And any deal to raise the debt ceiling will likely include spending cuts.

Ironically enough, a majority of these states (South Carolina, Tennessee and Virginia) are considered red states, where residents predominantly vote Republican – the party that’s been urging budgetary cuts in everything from health care to Social Security. In listing South Carolina, Moody’s (MCO) factored the state’s vulnerability to federal contracts and Medicaid payments. In Tennessee and Virginia, the economies are heavily dependent on federal government jobs.

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Source: Nin-Hai Tseng | Fortune