Governor: Outlook better for California note sale

SAN FRANCISCO (Reuters) - A week after warning that California could be pressed to seek financing from the U.S. government, Gov. Arnold Schwarzenegger said on Thursday that liquidity in markets appears to be improving and his state is hopeful it can sell short-term notes next week.

A frozen municipal debt market appears to be thawing, decreasing concerns that the most populous U.S. state and biggest U.S. issuer of municipal debt would not be able to sell the revenue anticipation notes to raise up to $7 billion it needs for state paychecks and other items over the near term, Schwarzenegger said in a letter to U.S. Treasury Secretary Henry Paulson.

Schwarzenegger had informed Paulson in a letter dated October 2 that California might need to turn to the federal government for short-term financing amid a lack of liquidity in credit markets.

"Although it's difficult to assess market conditions with perfect precision, the passage of EESA (Emergency Economic Stabilization Act) and ongoing actions by the Federal Deposit Insurance Corporation and the Federal Reserve System appear to be improving liquidity," Schwarzenegger said in his latest letter to Paulson.

"Although California feels the enormous effects of our current economic crisis, I am optimistic that these efforts to improve liquidity are moving the country toward more stable economic footing," Schwarzenegger added, noting he was encouraged by Massachusetts' sale of $750 million in short-term notes on Wednesday.

CALIFORNIA BONDIN'

California aims to issue its revenue anticipation notes -- if market conditions permit -- starting with the sale of $4 billion of the notes next week, State Treasurer Bill Lockyer's office said on Wednesday.

"There have been positive signs that the credit markets are thawing," said Tom Dresslar, a spokesman for Lockyer.

"The last couple of days have brought some positive signs, so we're hopeful we'll be able to complete a RAN deal next week," Dresslar added, also pointing to the notes sold by Massachusetts, a deal that had been postponed twice.

Lockyer, a Democrat, and Schwarzenegger, a Republican, partnered on last week's warning to the U.S. government and they have joined forces to market next week's note sale.

Radio advertisements for the note sale began airing on Thursday with Schwarzenegger promoting them. The advertising campaign is part of a program Lockyer launched in mid-2007 to encourage increased sales of state debt to retail investors.

His Buy California Bonds program has resulted in retail investors buying between 21 percent and 50 percent of the state's debt during issuances since its launch.

Retail investors will have the first shot at California's notes on October 14 and on October 15. The sale will open to institutions on October 16 and close on October 23. Banc of America Securities and Goldman Sachs will manage the sale.

(Reporting by Jim Christie; Editing by Jan Paschal)