CMA Gives California a 20.07% Chance of Defaulting

Earlier this week, California Governor Arnold Schwarzenegger revealed that he will be seeking "terrible cuts" in order to eliminate the $18.6 billion budget deficit that the state is currently facing.

Schwarzenegger also revealed that he won't seek tax increases to order to help close the gap, as he doesn't believe that raising taxes right now "is the right thing to do."

These words set up a forthcoming brawl between California Democrats and Republicans ahead of the July 1st budget deadline. A number of analysts feel as though budget negotiations may carry on past that date, which will just serve to darken the cloud that is already hanging over the state of California.

Just how bad are things in California right now?

According to the CMA (a CME Group Company), California currently has a 20.07% chance of defaulting on their debt. This makes California, in the eyes of the CMA, the 8th most likely to default of the world's sovereign debt issuers. This puts California slightly ahead of Lebanon and Sicily (#9 and #10 on the list respectively), and slightly behind Dubai (25.53% probability of default) and Latvia (20.45% chance of default).

The CMA has something called the CPD (Cumulative Probability of Default) which is calculated daily. The CPD is calculated using credit default swap data.

California has seen its credit rating weaken dramatically over the past 20 years.

In the late '80s, California had a perfect AAA credit rating at Moody's, Standard & Poor's and Fitch. Over the past 10 years things have really come off the rails in the state, thanks in part to the implosion of the dot-com bubble, multiple recessions and significantly increased unemployment rates. California currently has a A- rating at Fitch and S&P, and a A1 rating at Moody's. Illinois is the next closest state to California in terms of credit quality, and they have an A+ rating at Fitch and S&P, and a Aa3 rating at Moody's.

According to the web site of Bill Lockyer, California State Treasurer, California had a total of $78,460,919,000 in long term bonds outstanding as of April 1st, 2010.

These next couple of months will be particularly nerve-wracking for the people of California as the state legislature tries to figure out how to close the massive budget gap.

Everybody is transfixed with the debt problems currently plaguing countries such as Greece and Ireland, but we should also be keeping a close eye on things at home as well.

Source: CMAVision.com - CMA Market Data

Filed under: The Economic Meltdown