Thursday, January 15, 2009

California: “Insolvent within weeks”

By Sam Jones at FT Alphaville:

Sovereign defaults are very much in the news, what with S&P downgrades, rating watches, negative outlooks et cetera on a number of European countries.

Add to those the world’s eighth largest economy, which is, in the words of its governor, now officially
……in a state of emergency.

Yes, it’s California.

Excessive? Hyperbolic? No. Here’s more Schwarzenegger from today’s state of the state address. Sobering.


I will not give the traditional State of the State address today, because the
reality is that our state is incapacitated until we resolve the budget crisis.
The truth is that California is in a state of emergency. Addressing this
emergency is the first and greatest thing we must do for the people. The $42
billion deficit is a rock upon our chest and we cannot breathe until we get it
off.
Schwarzenegger added that California would be insolvent “within weeks”. Indeed, the state government has already ordered state offices to shut for two days a month and for civil servants to take unpaid leave. In mid-December the state ordered a moratorium on all public works. A rather anodyne sounding move that the governor today put into context:

So now the bulldozers are silent. The nail guns are still. The cement
trucks are parked. This disruption has stopped work on levees, schools, roads,
everything. It has thrown thousands and thousands of people out of work at a
time when our unemployment rate is rising.

The truth of the matter is that things are likely to stay this way. Californian officials know that they cannot default on their debts. To do so would be a monumental disaster for American state funding. Jason Dickerson, a budget official at the Legislative Analyst’s Office said last week:

By all accounts, debt payments appear to be safe in the coming months.All state
officials are unified in believing that debt service is a very high state
priority for the limited cash that is available.
So public spending will have to suffer. So too will California’s residents.

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