Now raising intellectual capital
Jefferson County, which has become the poster child for corrupt municipalities getting burned by the credit crisis, let go two thirds of its employees today as it struggles to stay afloat, according to Reuters. Though Jefferson County is an extreme example, it’s a reminder of the very real pain local governments and economies feel when fund raising is no longer an option.
The proposed California budget is looking an awful lot like trickle-down economics. But instead of the classic theory of wealth at the top seeping down to the bottom, the budget would have the state push losses down the pecking order to local governments.
While the full legislature isn’t expected to vote on the proposal until Thursday, the broad outlines of the budget should make the state’s cities and counties shudder, since the proposal would deprive them of already dwindling revenues at a time when borrowing your way out of a jam isn’t much of a fallback plan.
Reuters is reporting that California lawmakers are close to inking a deal to close the $26.3 billion budget gap. You know what that means: no more IOUs. So don’t expect to see the IOUs popping up on a trading screen near you.
While a deal will bring the IOU drama to an end, it should create a new one in financial markets: a jump in California muni bonds since an agreement takes the prospect of default – no matter how unlikely it was in the first place – off the table.
Pouring trillions of dollars into the global financial system has done more than pull the world away from the abyss.
It has convinced many to look again to well-worn signposts like major stock exchanges, currencies and sovereign debt to gauge where things are headed, rather than keeping their eye on credit markets to figure out where and when it will end. Take the attention being given today’s stock market rally.
Fitch Ratings is at it again. The credit rating firm cut California’s general obligation bonds by two notches to BBB, leaving the rating just two notches above junk. Fitch had already cut the state’s full faith and credit bonds one notch on June 25.
The junk threshold is an important one to keep in mind. If it’s breached, fund managers who can only invest in investment-grade credits would be forced to sell, causing valuations to tumble further. It would also turn up the pressure on legislators to sort out their differences and close the $26.3 billion budget gap.