California’s debt rating was slashed by Fitch Ratings to triple B – two notches above junk – after the state was forced to issue IOUs for certain payments while it frantically tries to agree a budget.

Further downgrades are possible, Fitch said, if legislators and Arnold Schwarzenegger, governor, do not end a stalemate over how to close a $26bn budget gap. “This underscores the urgency to solve our entire deficit,” Mr Schwarzenegger said.

By issuing the IOUs for what is considered non-priority payments, including vendor bills and tax refunds, the state is taking steps to ensure debt service on California’s nearly $70bn in general obligations bonds, Douglas Offerman, an analyst at Fitch, said.

“Right now we do not have any concern about the payment of debt service,” he said.

Source/Full Story: FT.com

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