Why Stop at 'BBB' for California Debt?

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...

Comments

[User 353732:]

The correct rating for California is "F" for Failed state.
Polities as big as California go morally bankrupt well before they go financially bankrupt. California lost its integrity well before it lost its tax base. The former leads to the latter.
Money cannot save California since there is not enough money in the Nation to satisfy the grasping avarice of its political class and the envy of its parasitic class.
Again California leads, this time in descending into class warfare, political farce and ideological darkness. Can Illinois, Michigan and New York be far behind?

Jul 07 06:28 AM

[TeresaE:]

""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"

Well, lucky for most of us "taxpayers" our lack of income is quickly moving us from "payers" to "drawers."

Looking around, I wonder just who in the hell our politicians think they will be able to tax?

Once forced health care and Cap & Trade hits, today's situation in California (playing out throughout our nation) will look like good times flush with cash.

Jul 07 09:55 AM

[yellowhoard:]

The powers that be at Fitch and Moody's are behaving in a way that borders on criminal.

California is circling the drain.

Everyone knows it.

I hope their is legal recourse against Fitch and Moody's when California bondholders start receiving IOU's.

Jul 07 10:09 AM

[a. palmer jr.:]

I hope California doesn't drag the rest of us down with it! Why should the rest of us have to pay for California's excess. I know I've lived within my means for 30 or more years and watched everyone with new cars and houses but I certainly don't believe it's my duty to pay for them. We'll probably end up with a new state anyway...Chinafornia!

Jul 07 10:48 AM

[User 20528:]

California is only a preview for what is coming for the rest of the nation.

Jul 07 10:53 AM

[User 20528:]

California is only a preview for what is coming for the rest of the nation.

Jul 07 10:56 AM

[Craig W:]

If I were a resident of California, I would be demanding the state treasurer to pay all elected officials and political appointees with their junk IOUs until they get the budget balanced. But then again, if I were a resident of California, I would likely be more focused on getting the hell out.

Jul 07 11:34 AM

[Mad Hedge F...:]

Why not? Perhaps it was deliberate that AMC Channel featured an Arnold Schwarzenegger film festival this weekend. Was the gratuitous violence of Terminators, Judgment Day, and the End of the World intended to drive us all to the negotiating table (“speak to the hand”)? We now have a new currency in circulation, Golden State "script", which is thoughtfully being printed in green as I write this. Of course the banks haven’t said they will accept this past July 10, so many spent the July 4th weekend at Big Five Sporting Goods stockpiling ammo and drinking water (everyone here already owns guns), possibly inspired by the Arnold movies. Many schools have already cancelled summer school, so of course, the malls are full of jobless kids lounging around and smoking cigarettes, with nothing to do. Towns are going without fireworks celebrations, and worried citizens are bracing themselves for a complete cessation of state services by the fall. Obama has wisely turned a blind eye to all of this, leaving we non taxing big spenders to stew in our own manure. For more on this see my earlier piece . With everyone of all parties thoroughly disgusted with their leaders, I’m surprised that the grass roots campaign for a state initiative to dump the two thirds majority required to pass a budget hasn’t welled up yet. Does France still have that guillotine thing? Is it available for rent? Will they take California "script"?

Jul 07 12:13 PM

[WS1835:]

On Jul 07 10:48 AM a. palmer jr. wrote:

> I hope California doesn't drag the rest of us down with it! Why should
> the rest of us have to pay for California's excess. I know I've lived
> within my means for 30 or more years and watched everyone with new
> cars and houses but I certainly don't believe it's my duty to pay
> for them. We'll probably end up with a new state anyway...Chinafornia!

Oh just wait......the legislature in Sacramento is banking on a bail-out. Obama won't be able to turn a blind eye to a 'too big to fail' state on verge of collapse...especially when that state has a huge congressional delegation that learned how to vote itself goodies a long time ago.

The house of cards is just about to go down......hard to see how the fed's can stay out of California when it goes broke. And hard to see how the fed's stay out of every other state once they intervene in California. The recent 'stimulus' payments to numerous states set a very bad precedent in my mind. It introduced the concept of direct, lump sum budget aid from the federal level. The states are used to tapping the fed's for grants and program specific funding. Now they have tasted direct subsidy. As addicted as they are to federal funding, can't imagine them not puching for more.

But the fed's are broke right? Don't have any money to give, right? Just remember that the last round of payments was borrowed money and the fed's are just as addicted to handing out money as the states are to taking it.

Jul 07 01:12 PM

[Old Trader:]

"But the fed's are broke right? Don't have any money to give, right? Just remember that the last round of payments was borrowed money and the fed's are just as addicted to handing out money as the states are to taking it."

If you think the US has been selling a lot of debt, just wait! Of course, what's going to happen when the rest of the world decides they quite enough of out T-bills/bonds? NOT a pretty picture....

Jul 07 07:06 PM

[Old Trader:]

should read "decides they have quite enough of our"

Jul 07 07:07 PM

[Northstar10000:]

And the walls come tumbling down.

Jul 07 07:20 PM

[billddrummer:]

Thanks, Tim!

Another contributor on SA showed who was getting paid in cash and who was getting paid in scrip:

seekingalpha.com/artic...

I just wonder 1)when the rating agencies get some moxie and downgrade CA bonds to junk, and 2) when the rest of the nation encourages the state to secede.

Jul 08 01:25 AM

[billddrummer:]

Thanks, Tim!

Earlier this week you showed who was getting paid in cash and who was getting paid in scrip:

seekingalpha.com/artic...

I just wonder 1)when the rating agencies get some moxie and downgrade CA bonds to junk, and 2) when the rest of the nation encourages the state to secede.

Jul 08 01:29 AM