Tags: Chris | Whalen | California | Default | Debt

Chris Whalen: California Will Default on its Debt

By    |   Wednesday, 17 Nov 2010 01:05 PM

The state of California is struggling with a $25 billion budget deficit and will ultimately default on its debt, says Chris Whalen, managing director of Institutional Risk Analytics.

“They’re going to default first, then I think you’re going to see some kind of federal workaround,” he tells Yahoo Tech Ticker.

“Obviously a default by a sovereign state within our federal system is going to hurt the credit rating of the U.S. There’s no way to avoid that.”

But Republicans in Congress won’t approve a bailout for troubled states, and the states themselves are unlikely to accept one, Whalen says.

“States are democracies. When they are confronted with insoluble issues, as most states are today when it comes to spending and taxes, they’re going to punt the first time around. I wouldn’t expect to see a resolution in California. I’d expect to see political gridlock.”

California will continue to issue IOUs rather than spending cash “until people don’t want to take funny money anymore,” Whalen says.

Eventually the state’s creditors will have to accept losses, and “pension obligations will have to be repudiated.”

Not everyone agrees California will default.

"That's pretty far from the truth," says Kenneth Naehu, head of fixed income at Bel Air Investment Advisors. "Bond holders in California are second in line to education, and that typically means the state has eight times the amount it needs to make debt payments."

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The state of California is struggling with a $25 billion budget deficit and will ultimately default on its debt, says Chris Whalen, managing director of Institutional Risk Analytics. They re going to default first, then I think you re going to see some kind of federal...
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Wednesday, 17 Nov 2010 01:05 PM
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