Maybe I’m missing something, but this whole making-money-on-IOUs scheme would seem to depend on CA’s continued solvency.The state’s debt rating was just downgraded this week to a couple of notches above junk. Doesn’t this concern investors? I wouldn’t touch any IOUs issued by a subprime borrower, which is what CA has now become.
What happens if, on Oct 2, Arnie announces that CA has exhausted its ability to borrow and roll over existing debt. If you were “entrepreneurial” enough to lay out 5K of your hard-earned cash for 7K in IOUs, you’d find yourself holding an empty back.
Coincidentally, the U.S. fiscal year begins Oct 1. If the U.S. has trouble raising $1 trillion for its gaping deficit (and all signs are now pointing to a failed auction in the coming months), how do you think that will bode for CA’s ability to borrow?
Oh, and if the printing presses are going 24/7, I very much doubt a measly 3.75% return will be worth the energy and effort involved in this operation.
Bottom line: we won’t really know which way the wind is blowing for the feds or the states until this Fall. If one domino starts falling, they all will.
