All Old New Again

State's bonds are downgraded again

California debt gets a worst-in-the-U.S. rating from Moody's.

By Dale Kasler -- Bee Staff Writer
Published 2:15 am PDT xxx, xxx 23rd, 200x

Unconvinced that California has solved its budget problem, a second Wall Street firm lowered the state's bond rating Monday.
This time the downgrade came from Moody's Investors Service, which chimed in the first day of business after Gov. Gray Davis signed the new state budget into law. Moody's action, coming two weeks after its rival Standard & Poor's issued a downgrade, reinforced California's plummeting standing on Wall Street as it prepares crucial bond sales to stay afloat financially.

Moody's said it was disappointed that the new budget leaves an $8 billion deficit into the next fiscal year, a gap that could top $10 billion if the state's economic forecasts don't prove true. Although it didn't mention the recall election, Moody's cited California's political gridlock and said "the state will have substantial difficulty closing this gap in the next budget cycle."

Moody's lowered California's bond rating a notch to a worst-in-the-nation "A3," or four notches above junk bond status. It had been "A2," tied with New York and Louisiana.

The downgrade will increase California's borrowing costs but it's not clear by how much. That's because Moody's was far gentler on California than was S&P, the other big Wall Street rating agency.

S&P, acting before the budget stalemate was broken, lowered California a resounding three notches July 24 to "BBB," or just two notches above junk status. S&P uses a different lettering system than Moody's.

Sorry to be such a one note blog recently but I think it is important to get this stuff out and on the record before the shitstorm. There's gonna be so much noise and spin that it will be important to have a roadmap and a feel for what will be tried and what will actually happen before the spin.

So, interesting. The story is already written, just cross out the name of the governor and the date for the next story. This plays out on the theme i've been pushing. California is out of tricks.

Update: Once again the old media is behind on the story LATimes excerpt;

The financial troubles of major bond insurers are rattling the municipal bond market, where about half the bonds issued in recent years have carried private insurance -- including in California.

If you own muni bonds, it might be wise to take a closer look at your portfolio to see how it could be affected by the insurers' woes. But there's a very good chance the bonds you hold didn't really need insurance in the first place, analysts say.

Many states and municipalities have long used private insurance as a way to enhance the appeal of their tax-free securities for investors -- turning, say, an A-rated bond into a AAA-rated one.

Now, Wall Street is worried about the health of the insurers that backed those gilded ratings because of the potential claims the companies face from insuring other bonds, particularly mortgage-backed securities.

"Their ability to meet their claims-paying obligations is being called into question," said Jon Schotz, co-founder of Saybrook Capital, a Santa Monica-based investment fund that focuses on muni bonds.

Some of these AAA insured double tax free munis are 3% trading at par. Any whiff of inflation and 80¢ is wishful thinking.