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What California's Credit Downgrading Means

It’s another hit in Schwarzenegger’s turf.

When it rains, it pours but in California’s case, economic woes are flooding the state with setbacks here and there. In a report by CNNMoney.com, the Sunshine State is currently beset by a shortage in budget. In effect, Moody’s Investor Service plans on a “multi-notch” downgrade if no improvement takes place. The report states, “The state’s current A2 credit rating is Moody’s sixth-highest investment grade and makes California the lowest rated of the 50 states. The 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.”

What does this have against the state?

First, this could affect its already battered financial condition. With the proposed downgrade, California will be facing increased borrowing costs since its ability to meet the terms of debt obligations on time will be much harder to achieve. Therefore, when it issues bonds to investors, it will expect few groups of interested takers.

Second, with less revenue because of the budget shortfall, the state will have fewer public projects to finance and public services to complete. This will discourage home buyers to settle in California. Also, the lack of public support in terms of infrastructure and services will have a negative effect on property appraisals. House values will further dip in the months to come after streamlining government policies.

Finally, the state’s funding profile will be marred by its limitations to gain capital with the cost of debt now rising to higher levels. The recovery will be longer than most predictions considering that the state is struggling with its housing woes, unemployment crisis and tougher lending standards.

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