Moody’s Stuns California
Kurt Brouwer June 19th, 2009
Moody’s rating service made an announcement today that does not represent news to the fixed income markets, but it was certainly not welcome news for California and its political leadership. This piece from Reuters spells out the latest in California’s continuing credit collapse. Read it and weep [emphasis added]:
Moody’s stuns California with debt warning (Reuters, June 19, 2009, Jim Christie)
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…
My only quibble is with the point that California officials were stunned by this move. What did they think would happen?
Via Zero Hedge
A few days ago, my buddy, veteran LA Times journalist, Tom Petruno, reported on his blog that the State of California wants to reassure debtholders that everything is fine:
…California Treasurer Bill Lockyer has insisted all through Sacramento’s latest budget crisis that he would never allow the state to renege on what it owes bondholders.
Yet when credit-rating firm Standard & Poor’s on Tuesday warned that it might cut California’s credit grade – which already is the lowest of the 50 states — S&P flagged at least the possibility of default.
In the first paragraph of its statement, S&P says that “although we continue to believe the state retains a fundamental capacity to meet its debt service, insufficient or untimely adoption of budget reforms serve to increase the risk of missed payments in our view.”
S&P’s language incensed Lockyer’s spokesman, Tom Dresslar.
“S&P raises undue alarm about the potential for missed bond payments,” he said. “There is zero chance of that happening.”…
That’s reassuring I suppose. And, not to cut too fine a point, but what’s the deal with outrage anyway? After all, California is a fiscal basket case.
Finally, if the Treasurer’s spokesman was outraged by Standard & Poor’s announcement, then he must be really fried about the Moody’s announcement mentioned above.
For more on this saga, see:
Feds to California — Drop Dead
Is a tax revolt brewing in California?
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