Reuters reports: As California struggles, Fitch cuts debt rating.
California suffered a new setback in its financial crisis on Monday when Fitch Ratings cut its rating on the state's general obligation debt to just two notches above junk status.
Fitch cut its rating on California's long-term bonds to "BBB," two notches above speculative grade, citing the state's budget and cash crisis. The state last week started issuing "IOU" promissory notes to pay for some bills in order to conserve cash.
AAA to BBB. That was just grade inflation!
How long before it's CCC?
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I heard yesterday at a dinner party that the state is issuing IOUs in place of unemployment cheques.
Those checks have no meaning unless you can cash them. The SEC has just ruled that they are securities and are hence governed by securities law.
You see unscrupulous ads on Craigslist already.
Like all securities, they will trade at the true discount rate (which is what someone would offer to California as terms) so effectively, they may issue checks for $100 but you may only get $94 for that IOU in the secondary market for them. Plus, you have to pay commissions to the brokers.
Effectively, everyone who's getting the IOU's is screwed.
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