Sunday, May 23, 2010

California and Greece

A good article comparing Greece and California's debt situations. More and more I think the best course to advocate is for CA to declare bankruptcy sooner rather than later. That way, at least some of the damage might be put on the guilty (i.e. on the over-paid public unions, bond holders and current electorate). Of course even in bankruptcy it's currently impossible to renegotiate public pension liabilities, but that too will have to change.
Last September the state of California sold $8.8 billion of prime rated short term debt to investors at an interest cost of 3%, similar to rates Greece was paying before the threat of default sent the rate to 24%. The Governor Schwarzenegger’s new budget projections indicate that California will need to borrow $12-15 billion just to get through the fall. Given that state’s economy is five times larger than Greece, if California is downgraded to sub-prime this fall and the crisis spreads to municipalities and other states, it might take up to a $5 trillion bailout to stabilize the situation.

The world would expect the U.S. Government to provide an American solution for a California debt crisis. But unlike Germany and France, who as the largest member states in the European Union were politically forced to shoulder the majority of the $1 trillion bailout of little Greece, expecting the America’s smaller states to have the political will and the financial wherewithal to bailout giant California is much more problematic.

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