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If Greece gets a debt guarantee, give California some credit

February 9, 2010 |  8:20 pm

Once again, California looks like a trendsetter.

The speculation in Europe on Tuesday was that the European Union, led by Germany, soon will offer to guarantee Greece’s government debt to allay investors’ concerns that the cash-strapped country might default.

That’s exactly what California Treasurer Bill Lockyer wanted from the Obama administration last spring, though on a much more limited scale.

Lockyer sought Washington’s help with the state’s plan to borrow via so-called tax and revenue anticipation notes, which provide a short-term cash bridge to cover expenses ahead of future tax payments.

Lockyer In normal economic times such short-term municipal note sales have been routine for California. But because of the state’s deepening budget woes and its low credit rating, Lockyer last May said investors were likely to demand exorbitant interest rates on the $10 billion to $20 billion of notes he expected to sell at mid-year.

His solution: Uncle Sam would guarantee the debt, allowing the state to borrow at lower rates because of the Treasury’s AAA credit rating. Lockyer pitched the plan as virtually risk-free for the federal government because he said California would never default. What’s more, he offered to pay the Treasury a fee for the guarantee.

But the Obama administration nixed the idea, clearly worried that if it insured California’s debt, even on a limited basis, plenty of other struggling states would be next in line.

Running out of cash, California began to issue IOUs in July to pay many of its bills, a hardship for the  thousands of businesses that sell goods and services to the state.

Lockyer finally was able to sell short-term notes in September -- without a U.S. guarantee -- after Gov. Arnold Schwarzenegger and the Legislature hammered out a budget deal and repaid the IOUs.

If the European Union agrees to guarantee Greece’s debt, the EU's leaders probably will note that the backstop should cost them nothing, assuming Greece makes good on it debts. And if the move stops Greece’s debt crisis from spreading to other financially weak European states, including Portugal and Spain, the guarantee will look like the right decision at the right time.

If Sacramento faces yet another cash crisis this summer, as is widely feared, here’s an idea for Lockyer: Forget about Washington; instead, apply for honorary European Union membership for California and put in a debt guarantee request in Brussels.

Just remind them of everything we already share: our Mediterranean climate, our spectacular wines and our Austrian-born governor.

-- Tom Petruno

Photo: California Treasurer Bill Lockyer. Credit: University of California