Bloomberg Fascinated With California CDS

In its Chart of the Day, Bloomberg finally picks up on a topic that Zero Hedge readers are all too familiar with - California CDS. In its coverage of a topic we have discussed (and charted) as recently as a week and as far back as 5 months ago, Bloomberg had this to say (alas to see it, you have to pay Mike $1,800 a month for the actual terminal - the chart is not free on the website):

Investors are increasingly bearish on California, the Golden state, which is facing a $24 billion budget deficit.

The CHART OF THE DAY shows the price on 1-year California credit-default swaps widened to 285.10 basis points from 200 basis points on May 8, according to data compiled by Bloomberg.

As Zero Hedge discussed a week ago, Cali CDS are cheap, maybe too cheap. There is much more widening to come as the CA crisis is doomed to escalate and the Governator will be stuck offering the only possible advice he has left for his fellow Californians (of course, absent the recently quitting smoking, but not quite, President footing another $30 billion taxpayer funded bailout).

And as Zero Hedge's cost structured is hindered by having exactly 0% of the Bloomberg journalist pool overhead, we can afford to provide the Cali CDS chart for free below.


Sphere: Related Content

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
• 

California Soon To Get Junked By Moody's

In what is sure to blow Barney Frank's lid wide open, Moody's (never one too far behind competitor S&P, except when it comes to TALF ratings) announced earlier it was preparing a major, multi-notch rating downgrade of the state if it does not produce a budget any time soon. As the latter is a pipe dream, California better prepare for its CDS to hit its recent all time wides.

[California's] A2 rating is just five notches above speculative status and Moody's raised the potential for the rating to tumble toward "junk" status if lawmakers fail to quickly produce a budget for Governor Arnold Schwarzenegger to sign.

"If the legislature does not take action quickly, the state's cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July," Moody's said in a statement.

"Lack of action could result in a multi-notch downgrade," Moody's added.

A downgrade could push California's borrowing costs up at time when state officials expect to issue up to $9 billion in revenue anticipation notes as soon as possible after a budget agreement is notched -- a deal whose timing is in doubt.

Moody's said California's leasing debt and other state-related debt are also on review, affecting a total of $72 billion of debt.

Moody's cited California's expected massive budget gap for fiscal 2010 of more than 20 percent of its general fund budget; warnings by the state controller that without budget solutions the state will not be able to meet all its financial obligations in July; continued political stalemate, and the limited options.

All in all, a complete disaster, and as Obama made clear recently, the Governator can not rely on bailout funding. Do you see what happens Arnie, when you don't have one million UAW pensioners living in your state, ordering Viagra, and never issuing recall notices on gas guzzling (stainless?) steel tinderboxes.

A downgrade of Cali would set off a chain of events, that will not only trash the ratings of virtually all other states, resulting in a skyrocketing of the MCDX, and major pain for associated index arbs, but also impair insurance companies directly and indirectly, with a final outcome likely being comparable to the Lehman blow up, however more protracted and, ultimately, more pronounced. And instead of confronting the problem head on and possibly finding way to resolve the state funding crisis before it is too late, the administration, day in and day out, keeps its head in the sand, pretending that things are getting better when in fact the economy is collapsing. In three months, when California "pays" all its vendors with IOUs and state refunds are indefinitely delayed into the next decade, any mention of 'green shoots' with just come from Dick Bove, who will likely issue a Strong Buy rating on Sacramento despite "horrific" mass hysteria and bands of roving Mad Max copycats coasting along I-5 at 120 mph in nitrous-retrofitted China-made Hummers. Sphere: Related Content

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
• 

Ahrrrrnold Is Running For The Choppa

California is on its own. At least that is the conclusion based on Tm Geithner's earlier statement that TARP cash can not be used to bail out the Golden (or any other) state.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington today. Among the hurdles: Money from the Troubled Asset Relief Program is reserved for financial companies, he said.

The Treasury chief said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

The municipal bond markets are “starting to find some new balance and equilibrium,” Geithner said.

Three observations: i) when did "the law" ever stop T^3 before; ii) If by new equilibrium Geithner means 0 then he is right, iii) isn't Barney Frank all over the task of providing US guarantees to munis for ever and ever, after extensive discussions with T3 and Dick Bove have revealed that there really is no other way to prevent the complete collapse of the world's fifth largest economy (which if the miles of empty containers at Long Beach harbor is any indication, then the world must be is in some serious trouble).

Wisconsin Democrat David Obey sums it best "We don’t want Uncle Sam to be Uncle Sucker." Of course, there is nothing that T3 and Barney would like more. Unfortunately for California, it may be too late. While its CDS has tightened recently, nothing fundamentally has changed from the time when its CDS hit well over 450 in late 2008. It is merely a matter of time before the state's risk goes back to those levels again from its current 200bps tighter price.

disclosure: no California CDS exposure.

Sphere: Related Content

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
• 

California CDS Cheap As State Likely To Default

California seems poised for imminent financial collapse and it is anyone's guess how far the impact of a state default could propagate. California CDS offered at 355 seem cheap, especially when one considers that the one year default prob per the spread is 17.7% at a 80% recovery rate and drops to 9% if one assumes 60% recovery. Of course the question is whether the federal govt will bail out Cali, and just how an event of default will be defined for General Obligation securities, although all signs point to a test very soon in the future. Either way, it is very likely the CDS will soon retest recent wides of 455.

Sphere: Related Content

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
•