Hooray! S&P raises outlook for California

The state's rating has been revised to "stable" from "negative," which is a much bigger deal than it might seem. Most important, the revision by Standard & Poor's diminishes the possibility of a further downgrade in the state's debt rating. S&P especially likes the fact that the state had instituted a mechanism in the recently passed budget to cut more spending if revenue projections don't materialize. From Reuters:

"There is a possibility down the road for a higher rating," said [S&P credit analyst Gabriel Petek], adding: "I think that it would be somewhat contingent on the state following through, if the revenues don't materialize, and successfully implementing the cuts that they have included in this budget."

Keep in mind that California still has an A- rating, the lowest of any of the 50 states. And as noted by the LAT, S&P analysts said the budget was a missed opportunity because it doesn't address the "backlog of budget obligations accumulated during the past decade of nonstructural responses to prior budget solutions." Still, the revision will probably mean cheaper borrowing costs - a big deal for a state that has lots to borrow. More from Reuters:

Josh Gonze, a portfolio manager with Thornburg Investment Management in Santa Fe, New Mexico, said the rating action could be important "in the popular perception of the man on the street." The cost of insuring California's debt with credit default swaps fell 11 basis points from Wednesday's levels, dropping to 164 basis points, or $164,000 per year for five years to insure $10 million in debt, according to data provider Markit. "The fact that it's rallying this strongly could be a sign of a significant shift in sentiment here in the near term," said Otis Casey, director of credit research at Markit in New York.