California’s Credit Rating May Be Cut by Moody’s

California is responsible for 12% of the United States’ Gross Domestic Product (GDP). The state’s GDP is at about $1.7 trillion and is roughly the 11th largest economy in the world.

June 19 (Bloomberg) — California’s credit rating, already the lowest among U.S. states, may be cut several levels by Moody’s Investors Service as government leaders seek ways to eliminate a $24 billion budget deficit.

The move would affect $72 billion of debt, Moody’s said in a statement today. California’s full faith and credit pledge is rated A2 by Moody’s, five steps below top investment grade.

Standard & Poor’s put California on watch for a possible reduction earlier this week, and Fitch Ratings did the same thing May 29. The rating companies cited the most-populous state’s deficit — more than 20 percent of the general fund — and lawmakers’ inability to agree on how to close the gap.

“If the Legislature does not take action quickly, the state’s cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July,” Moody’s said in a report today. “Lack of action could result in a multinotch downgrade.”

Earlier this week, Republican Governor Arnold Schwarzenegger said he would refuse to back any tax increases as Democrats proposed a budget that would raise $2 billion from cigarette consumers and oil companies to help the state deal with declining revenue. The veto threat signaled an escalating battle over the deficit just a month and a half before the most- populous U.S. state is forecast to run out of money to pay its bills.

‘Danger’ of Reduction

An S&P reduction “the danger that we face if we don’t do the budget on time,” said Schwarzenegger at a town hall meeting in Fresno yesterday. “And keep in mind, California’s credit rating is already the lowest in the country because of the inaction and because they always are kicking that can down the alley.”

Without a balanced budget, California’s treasurer and controller have said the state will have difficulty securing the short-term loan needed to fund the government until the bulk of tax collections come in later during the budget year.

California taxable 30-year Build America Bonds paying 7.55 percent traded at about 94.56 cents on the dollar yesterday to yield 8.03 percent, down from as high as 98.16 cents and 7.07 percent a week earlier, according to Municipal Securities Rulemaking Board trade data.

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