Tuesday, October 07, 2008

California May Need Emergency Funds: Hopefully they Won't Default

This does not bode well for California based Munis.

The situation is complicated by frozen credit markets that may impede the state's ability to borrow as much as $7 billion of short-term notes next week. Without the loan, the state could run out of cash by month's end.

Schwarzenegger last week wrote to Treasury Secretary Henry Paulson saying he may ask the federal government for an emergency loan if the state can't find investors willing to lend the state money until tax receipts arrive.

I guess those "economic girlie-men" at the credit rating agencies better not cut their debt or we may see the next big economic blowup occurring in the Golden State. If California should happen to default then it will be the same thing as having the worlds 7th biggest economy suddenly going bankrupt.

California, the biggest borrower in the municipal-bond market, has $51 billion in general-obligation debt outstanding. The state is rated A+ by Fitch Ratings and Standard & Poor's, the fifth-highest rankings, and a comparable A1 by Moody's Investors Service.

These ratings agencies need to be watched like a hawk to see if they downgrade California's credit rating in the coming weeks. If they do then it might be death spiral time for the Muni market.

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