News this week that California would begin issuing IOUs helped crystallise the enormity of the fiscal crisis confronting the state.
That the IOUs are now feeding into banks should serve as a reminder of just how intertwined the fortunes of the state and the financial sector really are.
The FT reported on Wednesday that Cali was preparing to issue IOUs to state vendors, local agencies and as income tax rebates, equivalent to about a month’s worth of funding, or some $591m. However, the IOUs were only useful as a stop-gap measure if people could find a bank that would actually accept them in lieu of cash:
Californians must try to find a bank that will take their state-issued IOUs. Talks have been held between state officials and banks to determine whether they will accept the IOUs in lieu of cash. An interest rate will be set on Thursday.
It looks like at least one bank — Bank of America — has been chosen. No word yet on the interest rate, however.
Here’s their statement:
Bank of America Announces Limited Acceptance of California State-Issued Registered Warrants for Customers and Clients
SAN FRANCISCO, July 1 /PRNewswire/ — Bank of America today issued the following statement regarding its decision to accept California state-issued registered warrants:
“Bank of America recognizes the State of California budget crisis will impact our clients and customers. To support our customers, while giving the state legislature additional time to pass a budget, we will accept California state-registered warrants - or IOUs - from existing customers and clients. Based on state disbursement estimates, we will accept the registered warrants through July 10.
(Logo: http://www.newscom.com/cgi-bin/prnh/20050720/CLW086LOGO-b )
“As always, we will work with customers who are impacted by the state budget issues on a case-by-case basis to address their short-term needs using our existing products and services.”
Well, that’s nice of them.
Of interest now though will be how long it takes BofA to recoup its money.
California is unlikely to honour the notes for at least 90 days — and then only if its Treasury has enough funds.
Related links:
Arnold Schwarzenegger declares “fiscal emergency” in California - FT Alphaville
