California Treasurer: We will not default on bonds

[ViC78]

Analyst Martin Weiss of Weiss Research said in a June 22 report that California’s financial woes create “a very high probability” that California will eventually miss debt service payments.
“Mr. Weiss’ analysis and recommendation, to put it kindly, is misinformed,” responded Tom Dresslar, a spokesman for state Treasurer Bill Lockyer. “Even the credit rating agencies said, in announcing possible downgrades, that the likelihood of default is low.
“We can’t stress it strongly enough. We have never defaulted on a debt service payment, and we will not default,” Dresslar said, pointing out that in the fiscal year ahead, there’s $50 billion available to cover about $5 billion in debt service. He also noted that debt service is a “continuing appropriation,” meaning that debt service payments are made even if a state budget hasn’t been adopted.

http://www.bizjournals.com/sanjose/s...9/daily20.html

Is this analogous to "We are well capitalised" ??

[c1ue]

Re: California Treasurer: We will not default on bonds

I cannot remember where I read it, but I believe the order of payment obligations which CA follows is:

1) Education
2) Bond holders

So the firemen, policemen, other state employees, other state utilities/commissions, etc etc all get thrown under the bus first.

Lockyer is thus not saying anything surprising. But of course what happens should all those other payment obligations not get paid?

[jpatter666]

Re: California Treasurer: We will not default on bonds

"The system is fundamentally sound."

[audrey_girl]

Re: California Treasurer: We will not default on bonds

been watching this train wreck for years and the state legislator in action (on inaction )

personally, I think CA will default.

anyone who has any exposure to CA bonds or other munis should seriously consider this happening and the possible resultant effect to their bond portfolios

[audrey_girl]

Re: California Treasurer: We will not default on bonds

CA will forfeit $ 3 billion tonight if budget not passed and signed:

http://www.latimes.com/news/local/la...,7817109.story


http://www.bizjournals.com/pacific/s...9/daily23.html

[Jay]

Re: California Treasurer: We will not default on bonds

"I am not a crook."

[rjwjr]

Re: California Treasurer: We will not default on bonds

"The system is fundamentally sound."

My thought exactly. It's just as EJ predicted, only on the State rather than Federal level. It will be an interesting precursor of how it will play-out nationally when the time comes.

Maybe Arnold could make a few more movies (Terminator type, not Twins) and donate his pay to California.

[solotar]

Re: California Treasurer: We will not default on bonds

Don't be a doomer. CA is indeed a total basket case, a state where public employee janitors (at BART) make $100K/year all in but the politicians claim they can't cut spending. It's a mess.

But CA is not going to default on its bonds, because CA has plenty of assets and plenty of money. The schools get the first dollars, and the bond holders get the next dollars. That's what the constitution says and that's what will happen.

Bad things will happen in CA. Prisoners will be released and some of them will be really bad guys. Cops and firefighters will get laid off. But the bondholders are going to get paid.

[WildspitzE]

Re: California Treasurer: We will not default on bonds

Don't be a doomer. CA is indeed a total basket case, a state where public employee janitors (at BART) make $100K/year all in but the politicians claim they can't cut spending. It's a mess.

But CA is not going to default on its bonds, because CA has plenty of assets and plenty of money. The schools get the first dollars, and the bond holders get the next dollars. That's what the constitution says and that's what will happen.

Bad things will happen in CA. Prisoners will be released and some of them will be really bad guys. Cops and firefighters will get laid off. But the bondholders are going to get paid.

CA is like any other debt slave, which has its own payment waterfall, just substitute education for food. For individuals, income goes to food first, then debt. Standard of living decreases as those two eat into available income. Look at standard of living (or the things that comprise it) as the equity.

Politically, however, will it come to the point where the Federal Govt comes to the conclusion that assisting CA is more expedient (according to their view of economics) than letting all of the people that depend on the "excess income" allocations be affected, along with those that depend/count on such services? Also, it's a nice [further] power grab too - would be nicer if it was one of those "rogue" states like montana, texas, or okla.

Will be interesting to watch.

[ThePythonicCow]

Re: California Treasurer: We will not default on bonds

would be nicer if it was one of those "rogue" states like montana, texas, or okla.

Maybe us Texans can bail out the United States.

Nah -- foreign aid is usually a waste of money.

[medved]

Re: California Treasurer: We will not default on bonds

Politically, however, will it come to the point where the Federal Govt comes to the conclusion that assisting CA is more expedient (according to their view of economics) than letting all of the people that depend on the "excess income" allocations be affected, along with those that depend/count on such services? Also, it's a nice [further] power grab too - would be nicer if it was one of those "rogue" states like montana, texas, or okla.

The fed govt already came to this conclusion. It is just a question of where is CA's pain threshold, what sacrifices it is ready to make. The obvious conditions for the help from the feds are more power for Obama's henchmen and higher taxes. Very likely, Obama will demand elimination of the prop 13 as a precondition for federal help.

[c1ue]

Re: California Treasurer: We will not default on bonds

Medved,

Where do you get this understanding of Obama demanding an end to Prop. 13 as a condition for a CA bailout?

I'm not saying it won't happen - if anything it would be a great excuse to put all the blame on the federal government and the CA deficit for a fiat removal of that law, but I'm curious as to whether you've seen specific policy statements on that by someone in the Obama administration.

[fliped42]

Re: California Treasurer: We will not default on bonds

Don't be a doomer. CA is indeed a total basket case, a state where public employee janitors (at BART) make $100K/year all in but the politicians claim they can't cut spending. It's a mess.

But CA is not going to default on its bonds, because CA has plenty of assets and plenty of money. The schools get the first dollars, and the bond holders get the next dollars. That's what the constitution says and that's what will happen.

Bad things will happen in CA. Prisoners will be released and some of them will be really bad guys. Cops and firefighters will get laid off. But the bondholders are going to get paid.

The question is not if they will default on their debt service payment the question is if they can rollover the debt and then at what interest rate and then if they can pay the reset interest. Over time as interest rates increase say to 10% and you have been financing 3-5 years at 5% in the fifth year your debt service payment doubles. So if CA has a 5 billion dollar debt service payment then when that rolls over it could be 10 billion. Please keep in mind I have no clue what the average maturity is but I will assume that some is going to rollover. So the risk is not the immediate cash flow obligation it is the inability to pay the rollover when called or the inability to finance the debt service at the higher interest rate. You must remember that the politicians since 1980 are use to interest rates only going down which enabled them to keep borrowing more at little or no change to their cashflow posititon. Now as interest rates are going up they are going to have to allocate more money to either paydown the rollover or continually budget higher and higer allocations to debt service coverage. Not pretty for state services in both senarios. Their is more then one way to default on a debt then just missing the monthly payment. But I have a funny feeling that the Feds are more then willing to help out at the price of relinquishing more state sovereignty to the Feds so I fully expect to be paing that janitors salary even though I live in NY. IMHO

[stealthcat]

Re: California Treasurer: We will not default on bonds

I came across this article today from Sudden Debt:

http://suddendebt.blogspot.com/2009/...l-as-ious.html

The part that jumped out at me was this suggestion:

After all, if California was a country it would have the eight largest GDP in the world.

But.. California in NOT a country, it does NOT have its own central bank and it does NOT issue dollars. It issues bonds priced in dollars, which is an entirely different matter. In that, it resembles Argentina back in the 1990s when it hard-pegged its currency to the US dollar, with disastrous results.

There has been much discussion in these forums regarding the USA's similarity to Argentina from the 90s. Could it be that California, which holds significant debt in "foreign currency" (ie - it can't print its way out like the federal government can) might be more similar to such a crisis?

[kartius919]

Re: California Treasurer: We will not default on bonds

Argentina has its own currency, California does not. You won't see a California currency crisis, although the IOUs are damn close to being money and perhaps unconstitutional?