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California says it may need $7 billion loan from U.S. Treasury

Posted Oct 3rd 2008 1:16PM by Joseph LazzaroJoseph Lazzaro RSS Feed
Filed under: Forecasts, Politics, Financial Crisis

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California Gov. Arnold Schwarzenegger has sent a letter to U.S. Treasury Secretary Henry Paulson indicating that the state may need up to a $7 billion loan from the federal government within weeks, because the state is having increasing difficulty funding day-to-day operations and accessing short-term loans, The Los Angeles Times reported Friday.

California routinely accesses short-term loans to remain solvent, but the state, like corporations and other businesses / organizations, is having trouble accessing funds from the bond market due to the credit crunch, The Times reported.

Lay-offs could follow

If the state is unable to access cash, payments to schools and other government agencies could quickly be suspended and state employees could be laid off, The Times reported.

Economist David H. Wang, although qualifying his comments by adding that he has not yet reviewed California's credit profile and cash flow, said Gov. Schwarzenegger's letter is another sign that the "financial crisis is affecting organizations and governments large and small."

"Corporations are scaling back bond sales or seeking other funding sources, bond sales by state governments are being put off, and lines of credit are being renewed at higher interest rates. These are all signs of increased apprehension by banks and other lenders," Wang said. "The financial crisis is getting worse, and we need to put measures in place to address it."

Wang said the U.S. House of Representatives' passage of the rescue package is a necessary step toward that goal. The U.S. House is expected to vote on the rescue bill today, following approval in the U.S Senate Wednesday, 74-25. "The House vote will reduce anxiety in the credit markets. There's a saying that 'a financial crisis is 30% reality and 70% worrying about the other reality.' Well, the rescue bill will address that 'other reality.' "


Wang said at this juncture he could not forecast the ultimate cost of the financial stabilization package to U.S. taxpayers, given numerous unknown variables. He noted only that if the rescue bill is passed, both the U.S. Treasury and the U.S. Federal Reserve "will then have sufficient authority to implement traditional and non-traditional monetary and fiscal programs to restore stability to the financial system."

In his letter, Gov. Schwarzenegger said that absent a clear resolution to the financial crisis, "California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing," The Times reported.

Fiscal/Economic Analysis: Another data point of concern regarding the credit markets. The State of California is not your typical, out-of-the-way agency, with limited revenue streams, seeking a short-term loan. If ranked as a country, California would have the ninth largest economy in the world as ranked by GDP. True, the state is facing a $16 billion budget deficit for 2008-2009, but that should not prevent it from accessing credit lines, which underscores the seriousness of the credit crunch. Here's hoping California does not need the loan from the U.S. Treasury.

Tags: Arnold Schwarzenegger, bond market, California, credit markets, fiscal policy, inthenews, Schwarzenegger, State of California, U.S. Treasury

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