California won’t default on its debts, but maybe it should
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
Paul Kedrosky at the Infectious Greed blog suggests it’s too bad California can’t default on its bonds, given the looming alternative reality of slashed basic services as the budget is collapsed.
I noted in this post that Sacramento is required under the state Constitution to make debt payments. Only education spending comes before debt service, under the law.
Kedrosky, a San Diegan, writes:
’. . . only education must be paid off before the next slug of cash goes to creditors. Get that? Healthcare, prisons, and other frivolities can all go to rack and ruin, but creditors must be paid, constitutionally speaking. That means, if you’re looking at this through the gimlet eyes of muni-bond ghouls, that California has something like $50-billion in budgetary space to make its $5.7-billion in [annual debt service] payments. It’s pretty easy to calculate that California can make the payment nut, even if it has to close hospitals, release prisoners and stop patrolling the highways to do it. ‘And that’s the problem. Because while California won’t default, at least not right now, for practical purposes it should. Its income and expenses are structurally out of whack, not merely temporarily so. The imbalance is an artifact of a bygone era, one that won’t come back any time soon -- perhaps not in our lifetimes. So, default. Say ‘whoops,’ financially speaking, and bite it. Better now than later.’
Screw the creditors? There’s certainly plenty of that going around. Ask GM or Chrysler bondholders -- or people who bought Treasury bonds early this year at rock-bottom yields.
-- Tom Petruno