Thursday, January 14, 2010

Cali's debt worries as leading indicator

It's often said that California leads the nation in all manner of cultural, political, and economic trends. That's partly why this recent S&P downgrade of California's debt ratings seems so worrisome.

From Reuters, "California debt rating cut as cash crunch looms":

"California's main debt rating was cut on Wednesday by Standard & Poor's, which said the government of the most populous U.S. 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.

Do Cali's debt problems and poor finances hint at trouble for other US states? We'll have more on that issue tomorrow, with a spate of new research and commentary to help us along. See you then.