Now that California is issuing IOU’s as payment Fitch Ratings has cut the credit worthiness to BBB – two notches above ‘junk status’.

Further downgrades are possible, Fitch said, if legislators and Arnold Schwarzenegger, governor, do not end a stalemate over how to close a $26bn budget gap. “This underscores the urgency to solve our entire deficit,” Mr Schwarzenegger said.

By issuing the IOUs for what is considered non-priority payments, including vendor bills and tax refunds, the state is taking steps to ensure debt service on California’s nearly $70bn in general obligations bonds, Douglas Offerman, an analyst at Fitch, said.[...]

The use of IOUs for non-priority payments would offset cash shortfalls into September 2009, as currently projected, Fitch said. But by the end of October the projected cash deficit expands to $16bn, beyond non-priority spending of $10.6bn, excluding tax refunds. The rating, which is four notches below that by Fitch for any other state, is Fitch’s second cut for California in the past few weeks. At the previous single A minus, California already had Fitch’s lowest rating. It is rated at single A level by Moody’s Investors Service and Standard & Poor’s.

Tom Dresslar, spokesman for California state treasurer Bill Lockyer, said: “It is hardly surprising; nevertheless, it is always disappointing, especially for a state that is already at the bottom of the ladder when it comes to credit ratings.”

He added: “The folks who will pay the price are tax-papers when we go to market to sell infrastructure bonds. It will cost taxpayers more money to build their schools, roads, levies, affordable housing.”

California bonds began weakening late in the day. Long-term debt has been yielding just over 6 per cent, about a full percentage point more than other state bonds.[...] (Source: Financial Times)

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