Moody’s has cut California bond rating to near junk-bond rating. Not only is this a slap in the face to California, but it also means that California will have to be paying higher interest rates on its bonds.
When you’re broke, paying higher interest rates is not a good option.
Note that Tom Dresslar, a spokesman for Treasurer Bill Lockyear, claims that “We’ve never defaulted. We’ve never failed to pay bond investors on time and in full. We’ll maintain that spotless record.” However, the fact is that California has been issuing IOUs for several weeks. Issuing IOUs is not quite the same as paying bond investors, is it?
The old saying is “As goes California, so goes the country.” We are looking at what the entire United will be within three years.
From Yahoo! News:
SAN FRANCISCO (Reuters) – Moody’s cut its rating on Tuesday on about $72 billion of California’s debt to near junk status, citing the state’s budget crisis, but a top lawmaker said a deal to close a $26.3 billion gap was near.
Moody’s Investors Service in a statement said it cut the state’s general obligation debt by two notches to Baa1, or three notches above speculative “junk” status and the rating may suffer further downgrades because of a growing risk to the state’s ability to make priority payments.
They include payments to investors holding the state’s debt.
Spokesmen for the state treasurer and state controller quickly countered Moody’s, noting priority payments would be honored while Republican Governor Arnold Schwarzenegger and leaders of the state’s Democrat-led legislature press on with talks to balance the state’s books.
“We’ve never defaulted. We’ve never failed to pay bond investors on time and in full. We’ll maintain that spotless record,” said Tom Dresslar, a spokesman for State Treasurer Bill Lockyer.
California less than two weeks ago began to issue IOUs to pay some bills in a bid to conserve cash as it struggles to balance its budget.
Moody’s said its downgrade “reflects the increased risk to the legally or constitutionally required payments (“priority payments”) as the state deadlock continues and the controller has begun to make certain payments that are not legally or constitutionally required to be paid on time (“non-priority payments”) with IOUs.”
Without a solution to the state’s budget gap, the risk to priority payments — and eventually debt service payments to bond holders — is increasing, Moody’s said.
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