Another CA downgrade

First came Standard & Poor's putting the state on a negative credit watch and now Moody's is warning that California faces a "multi-notch downgrade" if it doesn't get its financial act in order. In other words, agree on a budget. But as Tom Petruno points out at Money & Co., the state Constitution requires that bondholders get paid, no matter what. How exactly that happens, however, is really the question. Moody's now has the state at A2, only five places above junk-bond status. A "multi-notch" downgrade could bring California pretty close to that junk level - and many pension funds and institutional investors are barred from purchasing junk debt. There are always buyers around, but if interest rates are crazy high, it would be extremely expensive to raise cash in the public markets - perhaps too expensive. Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said Moody's should have made clear that the actual chance of a default remain remote. From Bloomberg:

Lockyer has led an effort to push rating companies to assign municipal bond grades that reflect their lower risk of default compared with corporate debt. "This is Moody's opinion and as we have seen time and time again, the opinion of Moody's, Fitch and Standard & Poor's is worth squat," Dresslar said. "They say that the likelihood of bond repayment is very high. That's an understatement. We have never failed to make a bond payment on time and in full, never in our history. They buried the lead."