California Treasurer Bill Lockyear says the state may act quickly to obtain a bridge loan in order to pay for the $5 billion in revenue-anticipation notes (RANs) the state will sell in August. The reason for the quick action is the concern that a breakdown in federal debt limit talks might touch off a ripple effect in debt markets. If California doesn’t get its loan then it won’t be able to pay back the RANs and could be left with a budget shortfall at the end of the fiscal year.
An interesting story of debt dependency to be sure. But are Mr. Lockyear’s fears of US default, based on the remarks of Fed Chair Ben Bernanke, misplaced? Veronique deRugy points out if the the debt ceiling isn’t raised by August 2nd this doesn’t mean the US will default. The Treasury can prioritize payments (e.g. pay interest on the debt first). Treasury Secretary Geithner has the authority to make those payments first. In addition Treasury can convert government debt into publicly-held debt.
For more, watch Veronique on Bloomberg’s Reality Check.