June 25, 2009 / 8:28 PM / 10 years ago

UPDATE 2-Fitch cuts California GO debt as crisis weighs

(Adds comments from Fitch analyst, state finance department official and from treasurer and controller)

CHICAGO, June 25 (Reuters) - Fitch Ratings on Thursday downgraded the rating on California’s general obligation debt and said it may lower the rating again, citing the state’s continued fiscal and economic stress.

The agency cut the state’s rating by one notch to A-minus, placing it four notches above speculative, or “junk” status, and making it the lowest rating of any U.S. state.

The debt remains on negative watch, said Fitch, as lawmakers struggle to close a $24.3 billion budget deficit.

California has $69.4 billion of GO debt.

The agency “expects the state’s finances will continue to be strained through fiscal year 2010 and beyond regardless of any likely outcome to the current budget impasse,” it said in a statement. Fitch also said that a delay in solving the fiscal problems could trigger additional rating action.

“The state would have to resolve its budgetary imbalance soon enough that it has an impact on state cash flows next month,” said Fitch analyst Douglas Offerman.

WAKE UP CALL

“If this isn’t a wake up call for people, I don’t know what is,” said H.D. Palmer, a deputy director in the state’s finance department.

He said the Fitch downgrade was another consequence of the legislature’s inability to present a budget solution to Governor Arnold Schwarzenegger that he can support.

A spokesman for State Treasurer Bill Lockyer said the state will make its debt payments.

“Regardless of our ratings, California will maintain its spotless record of never failing to pay bond investors on time and in full,” said Tom Dresslar, Lockyer’s spokesman.

The Fitch downgrade came as both Standard & Poor’s Ratings Services and Moody’s Investors Service have warned they too may downgrade California’s GO ratings.

Moody’s said last week that California could be in for a multi-notch downgrade of its A2 rating, while S&P rates $57 billion of the state’s outstanding GO bonds A. The Fitch rating is now lower than that of its two main rivals.

California’s controller on Wednesday said IOUs may have to be issued in a week to pay bills if lawmakers fail to patch the budget soon. The state’s new fiscal year begins July 1.

On Thursday, Controller John Chiang and State Treasurer Bill Lockyer called for immediate action by the legislature and governor to boost the state’s liquidity aside from a budget-balancing fix.

“There is no need to hold these measures hostage pending a full budget settlement,” they said in a joint statement. “Their enactment is inevitable, and quick approval of these payment deferrals and reductions will provide sufficient cash to avoid issuing IOUs starting July 2.”

Fitch also downgraded California’s almost $10 billion of appropriation bonds by one notch to BBB-plus, or three notches above junk. (Reporting by Karen Pierog; Additional reporting by Ciara Linnane and Thomas Ryan in New York; Editing by Diane Craft)

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