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Califonia Races Greece to Higher Bond Costs

Thursday Feb 4, 2010

 California is now paying 3 percentage points more than the Treasury bonds to finance its debt. 

We will be discussing this article on the Black board website as a learning tool for Chapter 14 on bonds in Intermediate Accounting. 

Important Learning Objectives here

A Credit Default Swap CDS is an insurance contract against bond default. The higher the premium or cost of the CDS, the more likely investors think the bond issuer may default or fail to pay. 

The evidence of that fear is how wide the spread is between the issuer interest cost and the 'safe' yield of Treasury bonds. Now that spread is more than 3 percentage point. A percentage point in bond parlance is 100 basis points. The spread is now more than 300 basis points. 

In the wake of the collapse of Lehman Brothers last year, and the required bailout of big banks and brokers, this is a serious concern. For those of you too young to remember, New York City defaulted in 1976. The Federal Government did come to the rescue but now we have entire states like California at risk. No one thought the government would fail to bail out New York City either….

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2 responses to “Califonia Races Greece to Higher Bond Costs”

  1. Tammy Salinas Avatar
    Tammy Salinas

    I winder however, if California is paying more than the treasury bonds to try to get money…wont people not want to tae a chance those bonds will default showing how bad of a situation California is in now?? One blogger in that article mentioned after adding all the tax including state, and federal etc, Californian’s pay a whopping 54% of their wages.. WHAT?!?! He also pointed out that most taxes on homes purchased pre 1990 were taxed on very little and still are today. I think this state needs to make things straight accross the board and pay more attention to where their spending is. If not, I think they are heading in the same direction the PIGS are…unless superman (US GOV) comes to the rescue. But, then who will rescue us?

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  2. Dennis Elam Avatar
    Dennis Elam

    Tammy has pretty well summed this situation up Glenn Beck had three non partisan tax think tankers on his show friday. They agreed that Texas had the best model. The legislature in Texas only meets every other year, otherwise they would just spend more money. No state income tax means that it is harder to find money to finance projects. Still we are on a $10 B rainy day fund, California, well it does rain in California.
    By the was the worst states for business in the US are
    New Hersey, New York, and finally CA, number three.

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