Wikinvest Wire

Why stop at "BBB" for California debt?

Monday, July 06, 2009

Reuters reports that Fitch Ratings reduced the rating on California's general obligation bonds from "A-minus" to "BBB", just two steps above junk status, as legislators continue to grapple with trying to make ends meet during the fiscal year that just started last week.

The state began issuing IOUs a few days ago, prompting the question, "Just what do you have to do to get downgraded to junk?"

At this point, they'll probably reach that milestone by simply doing nothing, which is, effectively, what they've been doing for about the last nine months to resolve the state's budget mess.

The ratings agency said they were keeping California "on watch" for another downgrade, the state's debt already the lowest rated of all 50 states.

The last time that the state had a "BBB" rating was in 2004, during the last budget crisis, shortly after Governor Gray Davis was recalled and replaced by Arnold Schwarzenegger who presided over one the largest housing bubbles in history which, in turn, generated oodles of tax revenue and helped make the budget problems go away for a few years.

They're baaaa-aaaack!

There's a bit more in the report from Reuters:

Tom Dresslar, a spokesman for State Treasurer Bill Lockyer, said the other two main credit rating agencies, Standard & Poor's and Moody's Investors Service, could soon follow Fitch's example. "I'm sure their patience is not deep," he said.

Lower ratings threaten to raise California's borrowing costs during a severe cash crunch in Sacramento, the state capital, one of Fitch's top concerns.

"The folks who are going to end up paying the price are not investors, not the governor, not the legislature, but the taxpayers," Dresslar said.

Standard & Poor's has California's general obligation bonds rated "A" with CreditWatch with negative implications. Moody's has warned of a possible "multi-notch" downgrade in its "A2," sixth-highest investment grade credit rating of California's general obligation debt.

In a statement, Fitch said it cut its "A-" rating "based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis."

California faces a $26.3 billion budget deficit for its fiscal year that began on July 1 and talks between Governor Arnold Schwarzenegger and lawmakers to balance the state's books are plodding along.
Things will probably get worse before they get better...

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Nick said...

On the one hand, California is dysfunctional, and has no hope of fixing their budget problems any time soon. On the other hand, as the rating agencies have pointed out, there's a huge difference between the same ratings on municipal debt and corporate debt. A BBB rating for municipal debt might be a AA rating for corporate debt on a "chance of default" scale; even Fitch said there's not much chance of a default any time soon.

On the other hand, they are totally correct that the people who will be most injured by the continued incompetence of the legislature are only the taxpayers themselves. Hopefully it'll only be state taxpayers (and not get offloaded to federal taxes for future generations), and I'll be out of the state by the time it collapses. I'll tell you one thing, though: if Arnold gets replaced by a Democrat, I'll be on the metaphorical "next plane out" of the state, cause huge unimpeded tax increases would be sure to follow.

Anonymous said...

Maybe California needs to get a cash advance. It is ridiculous that California has done this to themselves, I say no to a bailout!!

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