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While California grapples with budget problems as a result of the havoc wreaked by the global recession, a collection of banks—Bank of America, Citigroup, Wells Fargo, and JP Morgan Chase among them—say that commencing Friday, July 10, they will not accept state IOUs, adding pressure for the state to close its $26.3 billion budget gap.
IOUs Result of Credit Crisis - The banks initially made a commitment to accept IOU payments when the economically devastated state announced that it would issue more than $3 billion in IOUs beginning on or around July 1. Since the beginning of the year, state leaders have tried and failed to agree on a budget, and Governor Arnold Swarzenegger imposed monthly one to three-day monthly furloughs on at least 200,000 state employees; the furloughs are still in effect. The state began issuing IOUs—‘individual registered warrants’—to hundreds of thousands of creditors one day after the end of the 2009 fiscal year. John Chiang, California state controller, said, “Without IOUs, California will run out of cash by the end of July.” California’s annual budget is the eighth largest in the world. If the state continues issuing warrants, creditors will be forced to hold them until their maturity on October 2 or find other banks willing to honor them before maturity. The maturity of the IOUs will allow the state to pay back creditors directly at a 3.75 percent annual interest rate.
Response by California Bankers Association - California Bankers Association spokeswoman Beth Mills says that some banks might work with creditors to develop a short-term resolution, such as extending lines of credit to creditors. Mills says the banks were concerned that there aren’t processes in place to accept IOUs; she said that some of the banks were also worried about fraud issues, and notes that the July 10 deadline was not set by all banks. She adds that dozens of state credit unions would continue to accept IOUs.
Significance of California's Problems - Twelve percent of the nation’s gross domestic product comes from California and the state has the largest share of retail sales of any state. Retail consultant Burt P. Flickinger, managing director of Strategic Resource Group, explains, “California is the key catalyst for US retail sales, and if California falls further you will see the US economy suffer significantly.” Flickinger warns of more national retail chain and brand suppliers bankruptcies. At one dollar for every 80 cents, the state sends more in tax revenues to the federal government than it receives in return. Although California’s deep recession primarily only affects the state itself, it could make it harder for a national economic recovery since, because of its size—38.3 million people—it affects businesses from Texas to Michigan. Even if lawmakers solve the state’s deficit swiftly, there will likely be more government furloughs and layoffs with tens of billions of dollars more in spending cuts. This could cause a ripple effect throughout the state’s economy and fear of even more job losses. Jeff Michael, director of the Business Forecasting Center for the University of the Pacific at Stockton, predicts that one million jobs are expected to be lost in the state in two years, with unemployment estimated to peak at 12.3 percent in early 2010. In 2008, for the first time since the Great Depression, personal income of Californians declined. Income revenue fell 34 percent for the first five months of 2009. [Associated Press, 6/29/2009; Wall Street Journal, 7/7/2009]
Entity Tags: California Bankers Association, Bank of America, Arnold Schwarzenegger, Beth Mills, California, John Chiang, JP Morgan Chase, Jeff Michael, Wells Fargo Bank, N.A., Burt P. Flickinger, Citigroup, Strategic Resource Group
Timeline Tags: Global Economic Crises
According to the US Labor Department, August jobless rates rise to record highs in California and Nevada; 27 other states see a rise in unemployment as well. Unemployment numbers climb to 12.2 percent in California and 13.2 percent in Nevada. With its unemployment rate rising to 15.2 percent in August, Michigan continues to lead all states, with Rhode Island rounding out the top four states with the highest unemployment since data collection began in 1976. Economists predict that the national unemployment rate will reach 10 percent in 2009, an indication that the recovery will not be led by consumers, although the job market is reportedly showing signs of stabilization, and economic growth may resume in the third quarter. States reporting at least 10 percent unemployment fell from 15 to 14 with Indiana’s rate dropping below the threshold. For a fourth consecutive month, joblessness in the District of Columbia exceeded 10 percent as well, rising from 10.6 percent to 11.1 percent. Nationally, unemployment climbed to a 26-year high, to 9.7 percent. According to Steven Cochrane, director of regional economics at Moody’s Economy.com: “There’s still a fair amount of weakness in some of the larger states. State finances are probably going to be among the last of all the various components of the broad economy to turn around.” Since the recession began in December 2007, the US economy has lost 6.9 million jobs. It is the largest national job loss since the Great Depression.
Jobless Benefits Claims - Ian Shepherdson of High Frequency Economics says first-time unemployment claims have to drop by 100,000 to about 432,000 to be steady with company payrolls. He expects a reasonable decline in first-time claims by next spring. Initial claims categorize those filing their first week of unemployment benefits, while continuing claims reflect those filing each week until the end of their 26-week benefit year. Jobless figures generally do not include those who have moved to state or federal extensions, nor do the figures include those whose benefits have ended. [Bloomberg, 9/18/2009; CNN, 9/24/2009]
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