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Thread: California Collapse to be precipitated by Moody's downgrade ...

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    Banned Melonie's Avatar
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    Default California Collapse to be precipitated by Moody's downgrade ...

    (snip)"California’s credit rating is already the lowest among all U.S. states.

    But with Moody’s, S&P, and Fitch still greatly influenced by massive conflicts of interest, it’s not nearly low enough.

    And sure enough, on Friday, Moody’s tacitly admitted as much, announcing that it may have to cut California’s rating by several notches in one fell swoop!

    Standard & Poor’s put California on watch for a possible downgrade a few days earlier. Fitch did the same May 29.

    The big problem: Once downgraded, California’s rating is likely to fall below the minimal level legally required for most money market funds, forcing these funds to dump California paper posthaste.

    Moody’s wrote:

    “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. … Lack of action could result in a multi-notch downgrade.”

    But lack of action is precisely what Sacramento is now becoming most famous for. In fact, in their latest scuffle, Democrats proposed a budget that would raise $2 billion from cigarette taxes and oil companies. But the governor promptly vetoed the plan. So now Sacramento is in a new, escalating battle over the deficit just weeks before the state is expected to run out of cash to meet payroll and other bills.

    State officials continue to insist that a state default is unthinkable … much like GM executives said their bankruptcy could never happen.

    In my view, there is a very HIGH probability that California will default.

    It’s obvious its debt merits a junk bond rating from every Wall Street rating agency.

    And it’s equally obvious that the ratings agencies are artificially inflating the rating, stalling downgrades, and grossly understating the risk to investors.

    My recommendations:

    1. If you wait for Moody’s or S&P to act, it could be too late. Even if you can’t get what you might consider a good price, sell all California paper now!

    2. Seriously consider dumping all tax-exempt bonds. I know the income is better than equivalent Treasuries. But if California defaults, it could set off a chain reaction of bond price plunges and defaults throughout the municipal bond market.


    3. Don’t underestimate the impact California’s depression is having — and will continue to have — on the rest of the U.S. economy. At $1.8 trillion, the state’s GDP is so large, any further deterioration could wipe out every so-called “green shoot” in the national economy seen to date.

    4. Stay safe, with a big portion of your nest egg in cash, tucked away in short-term Treasury bills … and with a very modest portion in gold, as an insurance policy against a dollar decline."(snip)

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    Banned Melonie's Avatar
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    Default Re: California Collapse to be precipitated by Moody's downgrade ...

    Well, Moody's did downgrade California muni bonds again ... but fortunately stopped short of the 'junk' level. Nonetheless, this downgrade has increased the interest rate which California must pay to sell additional bonds to the point of unaffordability.

    In response, California's treasurer has come up with a lower interest option to 'borrow' additional money ... by the issuance of IOU's to certain California 'creditors'. This way the state of California and not the bond market can control when the 'creditors' will actually get paid, as well as what rate of interest they will receive. The problem of course is that the 'creditors' are not voluntary participants !!!

    (snip)"SACRAMENTO, Calif. – California Controller John Chiang (CHUNG') says thousands of Californians will be hurt and it will cost millions if the state hands out IOUs instead of payments.

    Chiang says Gov. Arnold Schwarzenegger and lawmakers need to come up with a complete solution to the state's $24 billion deficit instead of making a political statement.

    Democrats are proposing to cut and delay billions in spending to prevent the IOUs — without solving the whole shortfall. Schwarzenegger says he would veto that plan.

    Without a new budget, Chiang said Friday that he will have to start issuing IOUs. Students expecting college grants and low-income seniors would not get paid, along with vendors providing services to the state.

    Chiang said taxpayers will also owe interest on IOUs."(snip)

    (snip)"State Controller John Chiang said he will have to start issuing IOUs as soon as Thursday without a budget revision because California will lack enough incoming tax revenue to meet all its payment obligations.

    Among those who would not get paid until after October are students expecting college grants, low-income seniors and the disabled, and vendors that provide an array of services. Counties also will have to wait to be paid for administering social services.

    The IOUs, also known as registered warrants, offer only a temporary fix to the state's cash-flow problem. Even if California issues the warrants, the state will be $600 million in the red in September, according to the controller's office.

    It's not clear whether banks will honor the state's pledge to pay later.

    The IOUs will look similar to a check but have the words "registered" printed on the front. If the state has enough cash in October, the state treasurer will pay the IOUs with interest.

    "We're not aware of any banks that (have) made a decision yet on whether they will honor those registered warrants," said Beth Mills, a spokeswoman for the California Bankers Association. "It's up to the individual banks."

    Mills said banks will determine whether they will cash IOUs depending on how much the state will pay in interest. A state board is not expected to announce the interest rate until July 2."(snip)

    from


    It now remains to be seen whether or not California banks will actually accept / cash these IOU's ... which are essentially the same as cashing a check today that is post-dated until next October !

    If the banks don't go along with this IOU scheme, a whole lot of college students, a whole lot of retirees, and a whole lot of gov't contractors are going to find themselves way short of cash.

    But perhaps the sneakiest bit is the state issuing IOU's to cities / counties ... which will now be expected to keep making MediCal and social welfare benefits available to eligible recipients, but with 100% of the cost now going against city / county budgets !!! This will almost immediately translate into an increase in sales taxes and property taxes, since California cities / counties aren't in any better shape than the state itself in regard to 'borrowing' additional money.

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    Default Re: California Collapse to be precipitated by Moody's downgrade ...

    It's also a nice way to lay all the heavy blame on the banks.

    "Wha? The bank/pawn shop/30 day loan place won't cash my check?" will be wailed across the state.

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