Issues With California IOUs

As a result of its budgetary issues, the State of California recently began issuing IOUs to several creditors in an effort to plug a $26.3 billion budget deficit and stave off a cash crisis for the state’s government.

In addition to issuing $53 million of registered warrants during the first week of July 2009, plans are for the state to issue over $3.0 billion in IOUs within the next 30 days to cover fiscal responsibilities such as tax refunds, welfare and vendor bills. These informal debt instruments are expected to carry a 3.75% interest rate of 3.75% and due on October 2, 2009.

If the state of California was not having enough problems, Fitch downgraded the states bond debt rating to “BBB” from “A-” on July 6, 2009. The State’s bond debt rating retains an investment grade, however it is now just two notches away from junk status.

Even though IOUs are transferrable, thus can be bought and sold, several of the largest U.S. institutions, to include but not limited to Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) are mulling over whether or not they will accept California ’s IOUs, or the states individual registered warrants beyond July 10, 2009.

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