California's financial paralysis and its deteriorating fiscal condition is not something that is widely reported. Still, investors hold tens of biillions of its bonds and the state has the fifth largest economy in the world. We should all be paying attention.
This week, S&P cut California's bond rating for its $46 billion in debt was lowered from A+ to A, the sixth highest of the 10 investment grades. At this rating, California is the lowest rated state, below Louisiana, the next lowest. Earlier this month, state controller John Chiang delayed $3.7 billion in payments on items such as corporate and personal income tax refunds.
No one believes that California will default on its debt. The state is enormously wealthy and its budget problems are political.
“The state would need to default on all local aid, its entire medical and judicial systems, its highway program, etc. before not paying GO bondholders. We are not close to that scenario yet,” said Matt Fabian of Concord, Massachusetts-based research firm Municipal Market Advisors ."
It seems that California's problems may be investors gains. The lower bond ratings will increase the yield on California debt, increasing payments for the state but providing more cash for investors.
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