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Tuesday, February 17, 2009


california faces bankruptcy

as the onset collapse of eastern europe feeds back through the global capital markets -- which is i expect the big story of the first quarter at least -- there are several other ongoing disasters as the full impact of the depression begins to take hold. one of those sidelights is the default of american states. zero hedge comments on the cheapness of state of california credit default swaps.

California CDS offered at 355 seem cheap, especially when one considers that the one year default prob per the spread is 17.7% at a 80% recovery rate and drops to 9% if one assumes 60% recovery. Of course the question is whether the federal govt will bail out Cali, and just how an event of default will be defined for General Obligation securities, although all signs point to a test very soon in the future. Either way, it is very likely the CDS will soon retest recent wides of 455.

california is taking drastic steps -- such as cutting 20,000 state workers, issuing IOUs and suspending tax refunds -- and yet cannot pass a budget as it mires itself ever deeper in a fiscal disaster.

to my mind one of the big surprises of the recent stimulus bill deliberations was the reduction of funds allocated to the states, largely to satisfy some small-state republican senators. i fear this -- both california's inability to address its problems and the federal inability to preempt the state's crisis -- will end up another example of how ill-suited our compromise-driven domestic political system is for dealing with a real collective crisis in its early stages, when something materialy helpful could be done but well before the undeniable fallout of disaster forces the more delusional or misanthropic parties into the consensus. too many politicians are, in the aftermath of so many good years, in too deep a state of denial as to how bad things are about to get.

by no means, it should be said, is this crisis limited to california. yves smith yesterday highlighted the state of kansas -- not exactly an epicenter of the financial crisis -- suspending tax refunds. but the problem is really national, encompassing 46 of the 50 states.

UPDATE: the journal reports as california is "days away from financial collapse".

UPDATE: paul kedrosky expects the 11th-hour resolution.

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