California prepared Wednesday to issue i.o.u.’s to pay its bills, a move that raises questions about its ability to make timely payments on the billions of dollars in state bonds that are currently outstanding. While state officials scoff at the notion of a potential default, further budget turmoil could have a big effect on the Golden State’s creditworthiness in the future.
Last month, Moody’s Investors Service warned that if California did not solve its budget problems soon, it would face a “multinotch†downgrade in the state’s credit rating. That day may have come and gone with the new fiscal year starting on Wednesday.
With the failure of the state legislature to come up with a plan to fill the hole in the state budget, which increased by $2 billion on Tuesday night to $26.3 billion as the legislators missed the deadline to cut school financing, California could be hit with a major credit downgrade very soon.
“The issuing of these i.o.u.’s is in effect a default on a debt,†Martin D. Weiss of Weiss Research told DealBook. “Bondholders should ask, ‘If the state would stiff their commercial creditors, what’s to prevent them from stiffing us in the future.’ â€
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