CA credit rating is cut

This time it's Moody's that has lowered California's credit rating two steps, to Baa1 from A2. That's three levels above junk bonds, which is generally off limits for the institutional investor crowd. (Last week, Fitch slashed its ratings by two steps, to BBB from A-.) Here's the Moody's statement, courtesy of Bloomberg:

"Moody's believes that as the days and weeks go by without enacted solutions to the current cash crisis and the $26 billion budget gap, the risk to priority payments, and eventually debt service payments, is increasing," Moody's said in a statement. "The downgrade incorporates the risk we believe exists at the current time, as well as the state's inability to solve the current difficulties in a timely fashion."

[CUT]

California's worsening financial crisis has weighed on the prices of California bonds, pushing up the yields compared with top-rated municipal securities. A state general obligation bond maturing in 2023 traded today for 96.25 cents on the dollar to yield 5.38 percent, 1.35 percentage point more than tax-exempt bonds with the highest credit rating, as measured by Municipal Market Advisors Inc.'s indexes.

Analysts keep hinting at the possibility of California defaulting on its debt obligations, but the chances of that happening are still considered small. Keep in mind that they're issuing IOUs not because the state has run out of money, but to ensure that there will be enough cash to make payments for the highest priority items under the state constitution. That includes servicing bondholders. Meanwhile, there are plenty of investors who are interested in California munis, what with those attractive yields.