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Moody's Stuns California With Debt Warning

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Moody's stuns California with debt warning

California, struggling to close a $24.3 billion budget gap, faces the prospect of a "multi-notch" downgrade in its credit rating if the state's legislature fails to act quickly to produce a budget, Moody's Investors Service warned on Friday.

The ratings agency's decision to place California's general obligation debt on alert for such a dramatic possible downgrade stunned state officials.

"I cannot remember reading a ratings note that raised the specter of a multi-notch downgrade," said H.D. Palmer, a spokesman for Governor Arnold Schwarzenegger. "It's another clear warning from the financial markets that there will be substantial and costly consequences if the legislature does not send the governor a budget that he can sign."

Moody's in a statement cited California's expected massive shortfall for fiscal 2010 of more than 20 percent of its general fund budget and limited options for plugging it.

The state's current A2 credit rating is Moody's sixth-highest investment grade and makes California the lowest rated of the 50 states. The A2 rating is just five notches above speculative status and Moody's raised the potential for the rating to tumble toward "junk" status.

"If the legislature does not take action quickly, the state's cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July," Moody's said in its statement.

"Lack of action could result in a multi-notch downgrade," Moody's added.

A downgrade could push California's borrowing costs up at time when state officials expect to issue up to $9 billion in revenue anticipation notes as soon as possible after a budget agreement is reached -- a deal whose timing is in doubt.

Moody's said California's leasing debt and other state-related debt are also on review, affecting a total of $72 billion of debt.

STATE FINANCES A MESS

Schwarzenegger and lawmakers face the task of closing a $24.3 billion budget deficit for the state's fiscal year beginning on July 1.

The gap was opened by the state's most severe drop in revenues since the Great Depression, including a steep drop in personal income taxes and sagging retail activity as consumers reined in spending, and the long-running downturn in housing.

Rising joblessness is also weighing on the state. Its unemployment rate jumped to 11.5 percent in May from 6.8 percent a year earlier, state officials reported on Friday.

The UCLA Anderson Forecast unit said this week the state economy would grow at more normal levels by the beginning of 2011, but will not create enough jobs to push the jobless rate below double digits until the end of that year.

As a result, the state government's finances will remain under pressure, said economist Steve Levy of the Center for the Continuing Study of the California Economy: "Today's budget challenges are overwhelming and it is certain that large budget challenges will remain in 2010 and 2011."

Standard & Poor's on Monday placed California on review for a possible downgrade, also citing concerns about the state's fiscal stress.

Spreads on California general obligation debt have widened as the budget crisis has worsened. Since May 1, the yield on the five-year California GO scale is up 92 basis points, compared with a rise of 41 basis points for the five-year benchmark Municipal Market Data triple-A scale.

The warnings by the rating agencies may scare off some investors from holding the state's debt, said Lawrence Glazer, managing partner of Mayflower Advisors in Boston. "It appears that California will have some unpleasant decisions ahead of them. ... A scary headline is probably enough to shake some investors out of their positions in the State of California."

On the other hand, California's strained finances may attract investors looking for risk premium. "Some investors will look at buying and getting a yield advantage from California," he said.

A warning to Britain.

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And this isn't like talking about some local county council with a funding crisis - this is the 8th biggest economy in the world.

Used to be the third biggest economy.

So many other US states are dependent on Cali much in the same way we are dependent upon the US.

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Yes, a big warning to Britain.

You cannot carry on spending money indefinitely, while also giving the people what they want; ie low taxes and big public spending.

Injins state failure is apparent.

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This is the reason why the hyperinflationistas have got it wrong. A bond crisis for Cali is just a foretaste of the crisis that will start to hit the US and UK. Once faith in your ability to repay your debt becomes apparent you lose your AAA rating; yields go through the roof; and it's impossible to fund all the various spending plans you have. A mixture of massive spending cuts and tax increases is all you have left. Printing money just isn't an option. There will be a crushing collapse in the money supply that will make every £ of debt that you hold a millstone round your neck.

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The bizarre thing is that unemployment is so high in Cali now but I am still seeing the Arnie adverts on TV telling people to come to California!

Peter Schiff talks about California on his radio quite frequently, in regards to their arcane employment laws and severe taxation. It is all smoke and mirrors there unfortunately.

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The pigeons are really coming home to roost now. A global bond crisis should be the next leg down. Crushing deflation will finish off the indebted.

Under what court system?

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Green shoots? :lol::lol::lol:

Panda eats green shoots and leaves. :lol: Panda's stripy bottom heading off o'er the hills.

Used to be the third biggest economy.

So many other US states are dependent on Cali much in the same way we are dependent upon the US.

You sure ? I knew it was on a par with the British economy - but bigger than Germany's ?

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Panda eats green shoots and leaves. :lol: Panda's stripy bottom heading off o'er the hills.

You sure ? I knew it was on a par with the British economy - but bigger than Germany's ?

Yes, for much of the 90s Cali was the third biggest - assume it was based on market value of the tech companies. For a time Cisco was technically the 'biggest' company on earth - meaning it was worth the most.

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I'm looking for that speech Arnie did where he boasts about embracing debt and progress.. and how all the nay-sayers were pussies.

Damn, wish I could find it :rolleyes:

Edited by libspero

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I'm looking for that speech Arnie did where he boasts about embracing debt and progress.. and how all the nay-sayers were pussies.

Well, we're already half way there then.

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I'm looking for that speech Arnie did where he boasts about embracing debt and progress.. and how all the nay-sayers were pussies.

Damn, wish I could find it :rolleyes:

Itsa gone busta, baby

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I'm looking for that speech Arnie did where he boasts about embracing debt and progress.. and how all the nay-sayers were pussies.

Damn, wish I could find it :rolleyes:

Are you talking about the classic "Economic Girlie Men" speech?

ArnoldEconomicGirlieMen.jpg

:D

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Are you talking about the classic "Economic Girlie Men" speech?

ArnoldEconomicGirlieMen.jpg

:D

Thats the one :D

Thanks!

(Ok, so I was a bit out on the debt/progress bit.. still classic though)

Edited by libspero

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(IF YOU AIN'T GOT THE) DO RE MI

(Woody Guthrie) (1937)

Lots of folks back East, they say, is leavin' home every day,

Beatin' the hot old dusty way to the California line.

'Cross the desert sands they roll, gettin' out of that old dust bowl,

They think they're goin' to a sugar bowl, but here's what they find --

Now, the police at the port of entry say,

"You're number fourteen thousand for today." CHORUS:

Oh, if you ain't got the do re mi, folks, you ain't got the do re mi,

Why, you better go back to beautiful Texas, Oklahoma, Kansas, Georgia, Tennessee.

California is a garden of Eden, a paradise to live in or see;

But believe it or not, you won't find it so hot

If you ain't got the do re mi.

You want to buy you a home or a farm, that can't deal nobody harm,

Or take your vacation by the mountains or sea.

Don't swap your old cow for a car, you better stay right where you are,

Better take this little tip from me.

'Cause I look through the want ads every day

But the headlines on the papers always say:

If you ain't got the do re mi, boys, you ain't got the do re mi,

Why, you better go back to beautiful Texas, Oklahoma, Kansas, Georgia, Tennessee.

California is a garden of Eden, a paradise to live in or see;

But believe it or not, you won't find it so hot

If you ain't got the do re mi

Dont you just love Long term Karma

Edited by Hywel Dda

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