California will borrow $5 billion from banks to bypass U.S. debt drama

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California will seek $5 billion in short-term loans from banks and other financial institutions next week, hoping to avoid the risk of being locked out of the markets if Congress fails to raise the federal debt ceiling by Aug. 2.

Treasurer Bill Lockyer had planned to sell at least $5 billion in so-called revenue anticipation notes to investors in August. The state typically sells such notes at this time of year to bridge the gap between its cash needs and the arrival of tax revenue later in the fiscal year.

But Lockyer’s office said Thursday he opted to raise cash more quickly by borrowing from banks to guard against “potential financial fallout from a debt ceiling impasse.”

If the ceiling isn’t raised the U.S. Treasury has said it will be unable to pay all of its bills. That has raised the specter of a debt default, which could drive U.S. interest rates higher across the board.

Lockyer on Tuesday will seek competitive bids from commercial banks, investment banks and other financial firms for the $5 billion in loans. The debt will be repaid later when the plan to issue revenue anticipation notes is revived, the treasurer said.

He also said he could abort the bank loan plan if the White House and Congress reach an agreement on the debt ceiling before Tuesday.

In October Lockyer borrowed $6.7 billion from banks at an annualized interest rate of 1.4%. Those loans were paid off when the state sold two series of revenue anticipation notes in November. The notes that matured in May paid investors 1.5%; the series that matured in June paid 1.75%.

In recent years, California’s short-term notes have been highly popular with small investors because the tax-free yields have been lucrative compared with near-zero rates on other short-term securities.

-- Tom Petruno

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