California takes out insurance against US debt deal failure

Thursday, July 28, 2011
By Paul Martin

State raises $5.4bn bridging loan from banks to cover ‘drastic consequences’ of missing 2 August deadline

By Ed Pilkington
Thursday 28 July 2011

The continuing deadlock over raising the United States’ debt ceiling is prompting drastic action across the nation, as individual states prepare for the worst.
California has taken out a $5.4bn bridging loan as an insurance policy should agreement over a deficit reduction package not be reached by the 2 August deadline.
The state has borrowed from eight banks, led by Goldman Sachs and Wells Fargo, as an emergency stop-gap. Normally in August it would sell $5bn of short-term bonds to keep itself afloat, but California’s treasury officials are fearful that failure to reach a deal in Washington could cut the state off from the bond markets.

California’s treasurer, the Democratic politician Bill Lockyer, said that the loan was needed to protect the state from the “immediate, drastic consequences” of failure to break the impasse. If unsolved by 2 August, he predicted, America would be pushed into a “financial and economic abyss”.

The risk that the federal government might quickly become unable to pay its bills is causing jitters in many states. Maryland and Virginia are the most directly in the firing line, as due to their proximity to Washington they both house large numbers of federal workers whose salaries – and thus state taxes – might be suspended.

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