[david austin]

Moody's release today

[California's] A2 rating is just five notches above speculative status and Moody's raised the potential for the rating to tumble toward "junk" status if lawmakers fail to quickly produce a budget for Governor Arnold Schwarzenegger to sign.


"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," Moody's said in a statement.


"Lack of action could result in a multi-notch downgrade," Moody's added.
A downgrade could push California's borrowing costs up at time when state officials expect to issue up to $9 billion in revenue anticipation notes as soon as possible after a budget agreement is notched -- a deal whose timing is in doubt.

Moody's said California's leasing debt and other state-related debt are also on review, affecting a total of $72 billion of debt.

Moody's cited California's expected massive budget gap for fiscal 2010 of more than 20 percent of its general fund budget; warnings by the state controller that without budget solutions the state will not be able to meet all its financial obligations in July; continued political stalemate, and the limited options.

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In what will likely turn into a governmental game of chicken I am placing my bets with the 'systemic risk being too great to allow California to fall to such depths'

Obama needs to think about this:

A large scale downgrade of Cali would set off a chain of events that will not only trash the ratings of virtually all other states, resulting in a skyrocketing of the MCDX, and major pain for associated index arbs, but also impair insurance companies directly and indirectly. All to witness a final outcome likely being comparable to the Lehman blow up, however more protracted and, ultimately, more pronounced.

The decisions get a little more difficult when you arent bailing out a state with a million UAW workers.

Tick Tock