California could default on its debt

California Fiscal Outlook. LAO

Like a heroin addict needing one last fix, California wants to stop. But, just one more injection of that sweet bond income and then tomorrow it’ll get its financial house in order, really, that’s a promise.

California has huge debt and obligations it cannot possibly meet, and default is inevitable, says financial analyst Chris Whalen. The old dodge of selling yet more bonds to pay current obligations isn’t really working anymore. California’s credit rating is low, which means the state must pay more interest on those bonds. Plus, the municipal bond market is nervous now, wondering what icebergs are lurking unseen, and that means fewer buyers. This is precisely what happened over a week ago when California sold $10 billion in short-term bonds, less than the $14 billion they offered, and were forced to offer higher interest rates.

California is the poster child for financial irresponsibility. The official estimate of the deficit is $20+ billion or more each year for the foreseeable future. I call it the Magic Expanding California Deficit Estimate, because it grows ever larger as the financial gnomes in Sacramento discover they’ve made yet more erroneous assumptions or somehow forgot to include relevant data in their previous estimates. For far too long both parties have been playing a cynical game of kicking the state’s problem into the future with bogus numbers, issuing more debt, and pretending everything is fine.

But that game is over. California’s financial problems can no longer be hidden. Band-aid solutions will no longer suffice. Neither will leaving the problem for those a few years later to figure out. California has obligations it must meet now. But it no longer has the money or the borrowing power to fund them.

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