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California's Ratings Downgrade Sparks Municipality Madness

Posted by: Lauren Young on February 9, 2009

Think of it as a muni Mardi Gras: California’s debt is now rated lower than Louisiana.

Thanks to a budget crisis, Standard & Poor’s (which like BusinessWeek, is owned by McGraw-Hill) cut California’s credit rating to A from A+ on Feb. 2. As a result, California is now the largest tax-exempt borrower in the lowest-rated state, behind Louisiana.

What does that mean for municipal bond investors? The implications aren’t dire, according to Tom Petruno in the Los Angeles Times.

“…Debt ratings are relative. Being at the bottom with an “A” grade doesn’t mean that S&P believes California is in danger of reneging on its debts. In fact, the state Constitution mandates that the state must repay its bondholders…But if there’s really no default risk, why should California be rated much differently than, say, Georgia, which has a grade of “AAA” from S&P?

Good question, Tom. Readers, what do you think?

Reader Comments

Richard Larkin

February 10, 2009 2:44 AM

In 1975, NYC had a legal obligation to pay debt service. But when it was running out of money, politicians had to choose between paying for debt service, or paying employees to continue to provide essential government services necessary for the health, safety and welfare of its citizens. It defaulted on its short term debt, rather than not pay for those services. California will be facing those same decisions. Do you really believe they are going to choose to pay investors at the cost of its citizens health, safety and welfare? A legal obligation to pay is only as good as your economic and financial ability to honor it. Homowners have to pay their mortgage, but also have to eat and stay warm, even if it means not paying the mortgage. When the state burns through all of its cash, who do you think will be asked to wait to get paid?

CA State Is A Mess

February 10, 2009 9:23 AM

CA politics and state revenue flows are in far worse condition than GA. Percieved risk rather than actual risk is driving the market right now. S&P should've downgraded the state a while ago.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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