California Credit Rating Cut Close to Junk After IOUs

From Bloomberg:

California’s credit rating was cut for the second time in as many weeks by Fitch Ratings after a stalemate over how to close a $26 billion budget deficit forced the most-populous U.S. state to pay some bills with IOUs.

Fitch lowered its rating of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high-risk junk ratings, and said the state may be cut further. The credit-rating company last lowered its assessment of California on June 25.

California, the largest issuer of municipal bonds, last week began issuing IOUs for the second time since the Great Depression as Governor Arnold Schwarzenegger and lawmakers remained deadlocked over the budget cuts needed to make up for revenue lost because of the recession. California Controller John Chiang said the step was needed to conserve cash.

“The downgrade to ‘BBB’ is based on the state’s continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis,” Fitch said in a statement.

The Fitch action affects $79 billion of debt -- $69.3 billion of general obligation bonds, rated BBB, and $9.7 billion of appropriations credits, rated BBB-.

Schwarzenegger, a Republican, and Democratic leaders of the Legislature remained divided over how to fix the budget after a meeting in the governor’s office late yesterday. Assembly Speaker Karen Bass, a Los Angeles Democrat, said she was “discouraged” and criticized Schwarzenegger for seeking to link government reforms to a budget deal.

The article is mainly self explanatory, but for a state government to endure downgrades to a level of BBB speaks exactly how bad things are at the moment. States almost never get that kind of treatment. The US government treasuries seems to be the only place now where money is safe at the moment. This could change of course.