California debt rating cut as cash crunch looms
Friday, 15 January 2010
SAN FRANCISCO, Jan 14 (Reuters): California's main debt rating was cut Wednesday by Standard & Poor's, which said the government of the most populous US state could nearly run out of cash in March -- and another rating cut might follow.
The state government's budget gap of nearly $20 billion over the next year and a half leaves it in a precarious situation, requiring tax increases or spending cuts, either of which may slow economic recovery, the agency said in a statement.
"If economic or revenue trends substantially falter, we could lower the state rating during the next six to 12 months," S&P said after cutting the rating on $63.9 billion of California's general obligation debt one notch to A- from A.
The new level is four notches above "junk" status, a level at which many investors refuse to buy debt.
"The big question is, is there any fear they will get downgraded out of investment grade (so) you may have to sell ... that's where I think it would get interesting or hairy," said Eaton Vance portfolio manager Evan Rourke.
Bond prices did not move much, though, since many expected the downgrade, he said.
S&P's downgrade was overdue because the state's revenues have been so weak, said Dick Larkin, director of credit analysis at Herbert J Sims Co Inc in Iselin, New Jersey. "Frankly I can't understood why it took S&P so long," he said. "They could have made that decision back in September."
California already had the lowest debt rating of any US state before the downgrade, and 39 state governments are struggling with shortfalls this fiscal year, according to the nonpartisan centre on budget and policy priorities.
Many are begging for more federal funds and caught between cutting social programmes, raising taxes, or both.
The housing market implosion was felt especially strongly in California, a subprime mortgage lending center. Its double-digit unemployment rate, one of the highest in the United States, is expected to endure for a year or more.
California's government resorted to issuing IOUs last year for the second time since the Great Depression when it nearly ran out of cash. Officials are scrambling to raise $1 billion for March and the shortfall could be worse in July, S&P said.
State Treasurer Bill Lockyer's spokesman Tom Dresslar said S&P's downgrade "highlights the critical need for the legislature and the governor to produce a swift budget resolution that is credible to the market."
The state government's budget gap of nearly $20 billion over the next year and a half leaves it in a precarious situation, requiring tax increases or spending cuts, either of which may slow economic recovery, the agency said in a statement.
"If economic or revenue trends substantially falter, we could lower the state rating during the next six to 12 months," S&P said after cutting the rating on $63.9 billion of California's general obligation debt one notch to A- from A.
The new level is four notches above "junk" status, a level at which many investors refuse to buy debt.
"The big question is, is there any fear they will get downgraded out of investment grade (so) you may have to sell ... that's where I think it would get interesting or hairy," said Eaton Vance portfolio manager Evan Rourke.
Bond prices did not move much, though, since many expected the downgrade, he said.
S&P's downgrade was overdue because the state's revenues have been so weak, said Dick Larkin, director of credit analysis at Herbert J Sims Co Inc in Iselin, New Jersey. "Frankly I can't understood why it took S&P so long," he said. "They could have made that decision back in September."
California already had the lowest debt rating of any US state before the downgrade, and 39 state governments are struggling with shortfalls this fiscal year, according to the nonpartisan centre on budget and policy priorities.
Many are begging for more federal funds and caught between cutting social programmes, raising taxes, or both.
The housing market implosion was felt especially strongly in California, a subprime mortgage lending center. Its double-digit unemployment rate, one of the highest in the United States, is expected to endure for a year or more.
California's government resorted to issuing IOUs last year for the second time since the Great Depression when it nearly ran out of cash. Officials are scrambling to raise $1 billion for March and the shortfall could be worse in July, S&P said.
State Treasurer Bill Lockyer's spokesman Tom Dresslar said S&P's downgrade "highlights the critical need for the legislature and the governor to produce a swift budget resolution that is credible to the market."