[California's] A2 rating is just five notches above speculative status and Moody's raised the potential for the rating to tumble toward "junk" status if lawmakers fail to quickly produce a budget for Governor Arnold Schwarzenegger to sign.

"If the legislature does not take action quickly, the state's cash situation will deteriorate to the point where the controller will have to delay most non-priority payments in July," Moody's said in a statement. "Lack of action could result in a multi-notch downgrade," Moody's added. A downgrade could push California's borrowing costs up at time when state officials expect to issue up to $9 billion in revenue anticipation notes as soon as possible after a budget agreement is notched -- a deal whose timing is in doubt. Moody's said California's leasing debt and other state-related debt are also on review, affecting a total of $72 billion of debt. Moody's cited California's expected massive budget gap for fiscal 2010 of more than 20 percent of its general fund budget; warnings by the state controller that without budget solutions the state will not be able to meet all its financial obligations in July; continued political stalemate, and the limited options.

In what is sure to blow Barney Frank's lid wide open, Moody's (never one too far behind competitor S&P , except when it comes to TALF ratings) announced earlier it was preparing a major, multi-notch rating downgrade of the state if it does not produce a budget any time soon. As the latter is a pipe dream, California better prepare for its CDS to hit its recent all time wides All in all, a complete disaster, and as Obama made clear recently, the Governator can not rely on bailout funding. Do you see what happens Arnie, when you don't have one million UAW pensioners living in your state, ordering Viagra, and never issuing recall notices on gas guzzling (stainless?) steel tinderboxes.A downgrade of Cali would set off a chain of events, that will not only trash the ratings of virtually all other states, resulting in a skyrocketing of the MCDX, and major pain for associated index arbs, but also impair insurance companies directly and indirectly, with a final outcome likely being comparable to the Lehman blow up, however more protracted and, ultimately, more pronounced. And instead of confronting the problem head on and possibly finding way to resolve the state funding crisis before it is too late, the administration, day in and day out, keeps its head in the sand, pretending that things are getting better when in fact the economy is collapsing. In three months, when California "pays" all its vendors with IOUs and state refunds are indefinitely delayed into the next decade, any mention of 'green shoots' with just come from Dick Bove, who will likely issue a Strong Buy rating on Sacramento despite "horrific" mass hysteria and bands of roving Mad Max copycats coasting along I-5 at 120 mph in nitrous-retrofitted China-made Hummers. Sphere: Related Content