As California Goes So Goes The Nation

California is a microcosm for the economic collapse of the nation.  Led by a Democratic Party, and  RINO Governor the socialists are grabbing for lifelines in the form of credit default swaps, the next logical step for the Nation.  California’s credit rating is tied for the lowest in the Nation as will the US after President Obama signs the largest NON-JOB CREATING pork barrel of socialist spending.  What Global Economies of the world will fund projects that have no future of developing cash to pay back the investment in US treasuries?  Lets take a look at California’s dilemma and see what it means for the nation.

California Budget Crisis Spurs Trading in Credit-Default Swaps

Banks, hedge funds and other investors seeking to protect themselves from losses tied to California’s budget crisis are driving an increase in trading in credit- default swaps linked to the state.

Credit-default swaps protecting against a default by California, the nation’s most populous state, have more than tripled since Sept. 5, according to CMA DataVision in London. Last week, the contracts for the first time showed up on a list of the 1,000 most actively traded in the Depository Trust & Clearing Corp.’s trade warehouse.

Banks and investors are using the derivatives to hedge against losses on interest-rate swaps, commodities contracts and other assets that face losses if the state can’t make good on its obligations, said Fabrice Pilato, head of muni derivative trading at Morgan Stanley in New York.

“Because California is the largest U.S. state and is currently facing a well-publicized cash shortfall, many parties that have exposure to munis in general and to California in particular” are using the contracts as a hedge, Pilato said in a telephone interview.

Plunging housing prices and financial markets and rising unemployment have siphoned tax revenue from the state, which is set to face $42 billion less than it will need to pay for schools, police and other services through June 2010.

Moody’s Investors Service last month placed $67 billion of the state’s debt on review for a possible downgrade, citing a “lack of legislative solutions” for closing the budget gap. Moody’s rates California’s long-term debt A1, tied with Louisiana as the lowest among U.S. states. Standard & Poor’s, which has an equivalent rating of A+ on California’s general obligation bonds, said in December it was considering a downgrade.

Budget Shortfall

Governor Arnold Schwarzenegger said Jan. 26 that legislative leaders were closing in on an agreement to eliminate the budget shortfall.

Despite the increase in trading of California credit-default swaps, the market remains relatively illiquid compared with that for contracts linked to companies. The rush to hedge and speculation there will be more negative headlines in coming months are distorting the actual default risks for the state, said Matt Fabian, managing director at Municipal Market Advisors.

Traditional tax-exempt municipal bond investors haven’t been using the credit-default swaps market, he said.

‘More Bad News’

“I think what the market is saying is there’s a high likelihood of more bad news,” Fabian said. “The risk of California defaulting hasn’t changed very much. It would have to stop paying on tens of billions of dollars of regular expenses before its constitution would let it default on its debt.”

Credit-default swaps protecting against losses on the state’s debt for 10 years have jumped 257 basis points to 350 basis points since Sept. 5 and reached as high as 507 basis points in December, according to CMA DataVision.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Five-year contracts on the Markit MCDX index, tied to 50 municipal issuers including California, have risen 59 basis points since the end of October to 210 basis points, CMA data show. It reached 350 basis points last month.

Credit-default swaps, used to hedge against losses or to speculate on the ability of borrowers to repay their debt, rise as investor confidence deteriorates. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if borrowers fail to meet their debt obligations.

As of Jan. 23, there were outstanding credit-default swaps on California covering a net $375 million of debt, according to data from the Depository Trust’s registry. That compares with an average of about $1.2 billion for the 1,000 most actively traded names, the data show.

The capitalists (private enterprise) vs socialists (unions) both contending for the good of their own selfish supporters, but which is posed to do the right thing for the people who ultimately pay the tab.  Will the employed public servants take a cut in pay while unemployment rises, or will they remember where the cash comes from that pays their salaries?  Lets take a look with the Governator’s plan.

Schwarzenegger Plan for Furloughs Upheld by Judge

Jan. 29 (Bloomberg) — California Governor Arnold Schwarzenegger can order thousands of state workers to take two unpaid days off a month to cut $1.4 billion from the budget, a judge ruled.

Superior Court Judge Patrick Marlette in Sacramento, California, today ruled in favor of Schwarzenegger in a lawsuit brought by employee unions seeking to block the furloughs. Schwarzenegger said yesterday that he would lay off workers to achieve the savings if he lost in court.

“I cannot help but recognize the huge impact this will have on state workers,” Marlette said at a hearing today in Sacramento. “My job is not to rule if this is the right solution but whether his action is authorized by law.”

The unpaid days off, scheduled to begin Feb. 6 for 238,0000 workers, amount to a 10 percent pay cut, according to labor unions that oppose them. Schwarzenegger, a Republican, ordered the furloughs to help conserve cash.

California, the most-populous U.S. state, is anticipated to have $42 billion less than it will need to pay for schools, police and other services through June 2010 because the recession and stock market have lowered tax revenue.

“The governor’s furloughs will save over a billion dollars and avoid laying off thousands of state workers,” said Matt David, Schwarzenegger’s spokesman, in a statement after the ruling. “As businesses and families across the state are cutting back to make ends meet, so must government.”

Appeal Possible

Jim Zamora, a spokesman for Service Employees International Union, Local 1000, a plaintiff in the case, said the group may appeal. SEIU filed an unfair practice complaint today with the state’s Public Employment Relations Board alleging the furloughs violate collective bargaining agreements.

“We feel we have strong grounds for an appeal. But we will not make a final decision until our attorneys have discussed all our options with our union leadership,” said Zamora in an e- mail.

Earlier this month, state Controller John Chiang said he would delay $3.7 billion in payments, including income-tax refunds, if the budget isn’t redrawn to ensure there is enough money for schools and to meet interest payments on debt, which are priorities mandated by law.

The deficit and cash shortage developed rapidly after Schwarzenegger signed this year’s budget in September. Since then, the governor called lawmakers into three special sessions and twice declared fiscal emergencies. On Jan. 7, he vetoed the only budget plan that reached his desk.

Schwarzenegger said yesterday that he anticipates they will strike a deal within the next few days on the deficit.

The case is Professional Engineers in California Government v Schwarzenegger, 2008-80000126, Sacramento Superior Court.