california to possibly default on billions in debt

[poetrychic]

i've been hearing about how california is slashing its teachers for next year in an effort to help close a budget shortfall...turns out, that budget shortfall is near $60 billlion so, if the government saves the world's 5th largest economy from failing (ala "they are too big to fail") does that elicit more cries of socialism and nationalism from the wacky right or will it be a good thing to keep california afloat?

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A warning bell on California muni bonds
As sure as the sun will set on the Golden State, analyst Martin Weiss says California is going to default.

NEW YORK (Fortune) -- Known for his early warnings on Bear Stearns and Lehman Brothers, analyst Martin Weiss of Weiss Research is now sounding the alarm about state of California municipal bonds.

In a new report, Weiss has some rather blunt advice for California muni investors: "Sell all California paper now!" His reasoning? California is facing a $24 billion budget gap with no obvious way to close it.

The state has appealed to Washington for a federal bailout, but it got a cool response from the Obama Administration. The next step is draconian cuts in state services and payroll, but Weiss says that will only deepen the "depression" in California, where the unemployment rate is 11.5%, by further cutting into tax revenue.

Asked to put odds on California defaulting on its $59 billion in outstanding general obligation bonds, Weiss doesn't hedge. "It's unavoidable," he tells Fortune.

If he's right, the impact on investors would be far broader and deeper than Bernie Madoff, General Motors (GMGMQ) or any of the other investment implosions that have occurred over the past year. Municipal bonds tend to be a retail product, which means that those most affected by a large muni bond default are not endowments, banks, or foreign governments but mom-and-pop investors.

A California default would be especially devastating for two reasons: Munis have generally been viewed as a safe haven and California is the nation's largest issuer of tax-exempt bonds. According to Morningstar, assets in California muni bond funds now total $46 billion -- with billions more of California bonds held in national muni funds and individual bond portfolios.

But if the situation is so dire, why do credit rating agencies Moody's and Standard & Poor's still give the Golden State an investment-grade, single-A rating? Weiss says that the rating agencies have been consistently behind the curve, and this crisis is no different. "They're very hesitant to downgrade," he says.

That said, both Moody's and S&P have put the state on a watch list and warned of possible downgrades. A downgrade below triple-B would likely precipitate a mass stampede by money market funds out of short-term California notes and make it much harder for the state to roll over maturing debt.

While Weiss believes the numbers point to a California default, he doesn't rule out last-minute intervention by Congress or the Obama Administration. Washington may be suffering from bailout fatigue, but the political consequences of allowing the largest state in the nation to default on its bonds may prove too great.

The last time a leading municipal bond issuer was on the verge of default was 1975, when New York City was going through its own financial crisis. Then-President Gerald Ford gave a speech vowing to veto any federal assistance for New York -- a speech immortalized by the next day's New York Daily News headline, "Ford to City: Drop Dead."

Even though Ford later approved federal loans to New York, the political damage was done. New York had voted Republican in 1972, but four years later, Ford wound up narrowly losing the state to Jimmy Carter, which ultimately cost him the election.

Analysts think Obama is unlikely to make a similar mistake. "The most important factor here is that California has 55 electoral votes," says Greg Valliere, Washington policy strategist at Soleil Securities. "At the end of the day, that's why I think Washington blinks."

Investor Daily: Analyst says California will default on debt - Jun. 25, 2009

[poetrychic]

they are readying their ious:

SAN FRANCISCO (Reuters) – California's lawmakers failed to agree on a balanced budget by the start of its new fiscal year on Wednesday, clearing the way to suspend payments owed to the state's vendors and local agencies, who instead will get "IOU" notes promising payment.

The notes would mark the first time in 17 years the most populous U.S. state's government would have to resort to the unusual and dramatic measure and would follow warnings by Wall Street that the state's credit ratings may be lowered, which would increase its borrowing costs.

While California lawmakers struggle with budget deadlines practically every year, this year's budget fight is taking place amid the state's worst drop in revenues from personal income taxes since the Great Depression as recession and rising unemployment aggravate the damage done to the state's economy from its long housing slump.

Democrats, who control the legislature, could not convince Republicans late Tuesday to either back their plans to tackle a $24.3 billion budget shortfall or make a stopgap effort to ward off the IOUs. The two sides agree on the need for spending cuts, but are split over whether to raise taxes to help fill the gap.

Democrats have pushed for new revenues while Republican lawmakers and Governor Arnold Schwarzenegger, also a Republican, have ruled out tax increases. They want deep spending cuts to balance the budget, but Democrats say that would slash the state's safety net for the needy to the bone.

In the secondary municipal market, California bonds due in 10 to 30 years were trading stronger as the market priced in expectations for a missed budget deadline, said Domenic Vonella, an analyst with Municipal Market Data.

"Not having a budget on time has been par for the course lately," added Parker Colvin, head of municipal securities trading at Stone & Youngberg in San Francisco. "We've seen Cal GO paper widen for the last three weeks or so and it has dragged down local credits in California as well. Today things are a few basis points better."

White House spokesman Robert Gibbs said the Obama administration is keeping a close eye on California's budget woes. State officials have proposed the U.S. government help with financial aid or by vouching for debt California plans to sell. "We continue to watch the situation and we'll see as it develops," Gibbs said.

In Sacramento, California's capital, State Treasurer Bill Lockyer's office is preparing plans to issue short-term debt assuming Washington will not guarantee it.

"We've been operating since May under the assumption that there will be no help forthcoming from the Obama administration," said Lockyer spokesman Tom Dresslar. "We did not ask for a bailout, repeat, we did not ask for a bailout. We wanted the federal government to step in and provide a backstop for our cash-flow borrowing."

CASH CRISIS LOOMS

The lack of a budget may trigger action by Wall Street credit ratings agencies, which have warned of further downgrades to the state's ratings.

Fitch last week downgraded its rating on California's general obligation debt by one notch to A-minus, placing it four notches above speculative, or "junk" status, and making it the lowest rating of any U.S. state, and warned of further downgrades.

Standard & Poor's and Moody's have also warned of possible downgrades to California's general obligation debt. Moody's has said the state could see a multinotch downgrade of its A2 rating.

On Wednesday, Moody's Investors Service had no immediate comment on the possibility of issuing IOUs or the state's failure to pass a budget. Analysts at Fitch Ratings and Standard & Poor's were not immediately available to comment.

Back in Sacramento, tempers flared in the state Senate as the midnight start of the new fiscal year neared.

"There is no excuse to hold this whole state hostage," state Senate President Pro Tem Darrell Steinberg told Republicans during a floor debate.

Senate Republican Leader Dennis Hollingsworth countered that major cuts are urgently needed. Otherwise, "there will be entire programs that will have to be lopped off," he said.

Due to the state's steep decline in revenue, California risks running out of cash later this month to pay all of its bills unless its books are balanced quickly. To conserve cash, State Controller John Chiang plans to issue IOUs by Thursday to the state's vendors, local agencies overseeing health programs and various recipients of state aid -- including the elderly and disabled and college students.

He plans to send $3.36 billion in IOUs this month to help maintain $10.9 billion in other payments, including money owed to investors holding California's general obligation debt.

"The general obligation bonds will be paid," Chiang told Reuters on Tuesday. "California has never defaulted on its debt obligation and we don't plan to do so."

California, which itself had the eighth largest economy in the world in 2006, according it its Legislative Analysts' Office, now needs to reassure Wall Street because state officials see the need to sell $7 billion to $9 billion of short-term debt once there is a budget agreement.

California government declares fiscal emergency over budget - Yahoo! News

wonder what would if ordinary citizens did that to their creditors?

and why is it that republicans will spend, spend, and spend some more but refuse to charge people via taxes?

[EvilMonkey]

I've always liked Arnie and I know he's taking his fair share of heat for this but if he's guilty of anything it's being dumb enough to attempt to govern that money pit. It was tanking long before he took over. It's admirable that he took it on but that place his screwed no matter who is at the helm.

[skajules]

So does Gray Davis get to be governor again now? After all he was recalled for the fiscal mess and Der Gropenfuhrer was elected to fix it. Since it's only gotten worse...

On a more serious note, California needs a new state constitution. Too much is decided by referendum, and the districts for state representatives are too gerrymandered. Scrap the whole state government and start anew.

[DanS.]

Does anybody else think California might be a weee bit too big in terms of size and population to be its own state?

I vote for N and S California.

[EvilMonkey]

Does anybody else think California might be a weee bit too big in terms of size and population to be its own state?

I vote for N and S California.

I have friends there who agree.

[ocealdia]

Does anybody else think California might be a weee bit too big in terms of size and population to be its own state?

I vote for N and S California.

I think it might be too big to allow to fail.

[ibex]

So does Gray Davis get to be governor again now? After all he was recalled for the fiscal mess and Der Gropenfuhrer was elected to fix it. Since it's only gotten worse...

On a more serious note, California needs a new state constitution. Too much is decided by referendum, and the districts for state representatives are too gerrymandered. Scrap the whole state government and start anew.

The CA referendum obsession is nothing more than mob rule and was started by the political RIGHT WING more than thirty years ago. It's closer to the French Revolution than the American one. Proposition 13 paved the way for the Golden State's empty municipal coffers of today. Californians are no different from the rest of us, if you're told over and over again that "freedom" means you can have whatever your cholesterol laden, enlarged heart desires no matter the cost then that's what you'll end up believing. What do you get? Prison guards making upwards of $150,000. per year and Enron running (or ruining) portions of your energy grid that are larger than those of some European countries. The really scary thing is that CA has done everything economically and politically that the Federal government and mant states have, just bigger, badder and bolder as usual, that's show biz. But is the massive default of the most populous state in the union a scary preview of things to come for the rest of us?

[Malkavian]

But is the massive default of the most populous state in the union a scary preview of things to come for the rest of us?

It is, if Chinese stop buying our paper.

[poetrychic]

But is the massive default of the most populous state in the union a scary preview of things to come for the rest of us?

we can all invade oregon, montana or north dakota, none of whom have any budget deficits....when those states get full, we can spill over in to south dakota and wyoming who only have a $32 million deficit..and then finally to arkansas and nebraska who only have a $150 million deficit

Where does your state rank? - CNNMoney.com