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California risks credit downgrade

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TEXT OF STORY

Steve Chiotakis: Boy, what a time for California politics. State lawmakers still can't agree how to plug an estimated $40 billion budget gap. Moody's downgraded the rating on billions of dollars worth of bonds that the state's already issued. And they threatened to downgrade California's overall credit rating. And all that has a lot of ramifications. Here's Rico Gagliano.


Rico Gagliano: Well, let's start with Californians. Tom Dresslar is spokesman for the state treasurer:

Tom Dresslar: If we get downgraded, the economic harm will fall on taxpayers, because the state will have to pay more to issue bonds.

And additional tax money would go to paying that debt, instead of, for instance, health care.

But what if you don't live in California? Marilyn Cohen of Envision capital management says you should still care about those downgraded bonds.

Marilyn Cohen: Since California is the largest issuer of tax-free bonds, probably anybody who is in the bond market has at one time or another owned a California General Obligation bond.

That could include your bond fund or money market. Now, it may sound like the makings for another financial earthquake, but Cohen says investors and fund managers are probably steeled for the shock.

Cohen: I think right now, the overall market has baked into the market that they're going to be downgraded. I mean, it has been very well telegraphed about the situation for California.

And of course, Golden State lawmakers might put together a budget plan and avoid a credit downgrade altogether. Seriously, it could happen.

In Los Angeles, I'm Rico Gagliano for Marketplace.

About the author

Rico Gagliano is the host of Dinner Party Download.

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