UPDATE: 7:45pm, July 26
California went through with plans to borrow money from Wall Street today as a hedge against a possible U.S. default.
The AP reports that California State Treasurer Bill Lockyer secured $5.4 billion in short term loans from a group of banks, credit unions, and investment funds. The bulk of the loans come from Goldman Sachs and Wells Fargo, with each providing more than $1.4 billion.
The so-called “bridge loan” will allow the state to avoid a cash shortfall if Congress fails to raise the debt limit by the Aug. 2 deadline.
“California had to obtain this interim financing to protect the state from the immediate, drastic consequences of a failure by Washington to resolve the debt ceiling impasse,” Lockyer said in a statement. “I’m hopeful Congress and the president will do the responsible thing, solve the problem before it’s too late, and not risk pushing the country into a financial and economic abyss”
The yield on the notes is 0.237 per cent, compared with 1.4 per cent California paid for short-term borrowing in 2010. The latest notes mature on Nov. 22, but the state may pay them off before.
1:07pm, July 14:
Bracing for bond market turbulence, California is considering asking Wall Street for a “bridge loan” in case Congress fails to raise the $14.3 trillion debt limit by the Aug. 2 deadline.
Bloomberg reports that, in the event that Congress fails to meet its deadline, the bridge loan would be used to help California pay its bills until the state can sell an estimated $5 billion of revenue-anticipation notes, or RANs.
The RAN sale is currently scheduled for late August, but State Treasurer Bill Lockyer fears that a U.S. default could lock California out of the muni market. If default forces the federal government to prioritise payments, it could also have a major effect on the state’s cash flow, he said.
Default shock waves would likely not be limited to the Golden State. Federal Reserve Chairman Ben Bernanke said Wednesday that U.S. default will reverberate across the financial system, precipitating a crisis in state and local finances.
Moody’s Investors warned yesterday that the loss of the U.S. AAA credit rating would trigger automatic ratings cuts on at least 7,000 municipal ratings.
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