Experts evaluate California default possibility

Will California default? Or at least default more than it has so far? Some opinions.

From Home Front.

But....some in the private market aren't so sure. CMA - a London firm that follows the market for credit-default swaps - puts California in some uncomfortable territory when it comes to probability of default. (Credit default swaps are a kind of insurance policy that banks, etc., can buy to protect themselves if a security goes splat).

On its Web site, CMA ranks the top 10 government entities in the world according to their probability of default. California came in ninth, with a 26.75 percent probability. It was just ahead of Romania (24.53 percent) and just behind Lithuania (29.38).

Martin Weiss

"In my view, there is a very HIGH probability that California will default.It’s obvious its debt merits a junk bond rating from every Wall Street rating agency.

And it’s equally obvious that the ratings agencies are artificially inflating the rating, stalling downgrades, and grossly understating the risk to investors."

Sudden Debt:

"Quite obviously, then, the budget crisis in California is fundamental in nature; it's not a party-politics stand-off to score points with the voters. It won't be easily fixed in a (non-smoking, surely) back room where deals are cut and backs are slapped. This is REAL and is happening in real-time.

Default probability? Certainly a whole lot higher than the A/A-/A2 ratings would suggest."

Street Authority:

"The risk was the bonds being downgraded to junk and losing a significant percentage of their value. But with Governor Schwarzenegger and state legislative leaders now back at the negotiating table and hopeful to reach a resolution within the coming week, that downgrade is looking less and less likely. The budget impasse will be solved -- that's always been a "when" question, not an "if" one."

Forbes:

"Maybe so, judging by the CDS market. A recent quote put California’s five-year contract at $282,000 implying a 50% probability of default. By contrast, Thailand looks safer with a contract of $201,000."



What do I think? The default issue is a choice to be made by employees of California state government and their political leaders. If substantial cuts in state employment feels more painful than a constitutional crisis, then California employees will choose default. By staying on the job and allowing default, employees of government may feel they have a better chance in the judiciary than the legislature.