California’s governor, Arnold Schwarzenegger, sent a letter to the Treasury last Thursday requesting an emergency loan of $7 billion. Without this loan, California would be unable to meet their financial obligations for the month, including teacher and law enforcement salaries. Typically, when states find themselves in a budgetary shortfall, they reach out to the credit markets and borrow the necessary funds there. Because of the financial crisis, though, California has essentially been frozen out of the credit markets, according to CNNMoney. The question now is whether the bailout will break this freeze and restore the credit markets. If so, how long will it take?
California isn’t the only state that is feeling the pinch, although it is the largest. If California has to start laying off state workers and making major cutbacks, you can bet the entire U.S. economy will feel the pain. Schwarzenegger was a strong supporter of the bailout, and he seemed to think it would solve California’s problems. While I think it foolish for him to rely solely on the credit markets to fix his state’s problems, the bill should help free up the credit markets a bit. If Schwarzenegger were smart, he would start taking the necessary steps to balance out his budget now. Even if credit markets are restored, there is no guarantee that they will be for how long. Investors are starting to take a whole lot less risk and you better believe that when they look at buying California bonds, they are paying attention to the states financial shortfalls.
The other question that needs to be answered is how long it is going to take for the Treasury to get this operation going. I assume that they are going to be working hard to get this thing rolled out as quickly as possible, considering the state of the market, but as of yet I have not seen a timetable. Are banks and other organizations going to be able to wait out however long it takes them to get set up? According to FT, California is only weeks away from running out of money, and their only hope right now is for the credit markets to come back or for the government to bail them out. One would have to imagine that if the government were willing to bail out banks and other companies, they would be willing to bailout its largest state. But if it comes to this, it could set off a red flare across the markets.