As California struggles, Fitch cuts debt rating

By Jim Christie

SAN FRANCISCO (Reuters) - California suffered a new setback in its financial crisis on Monday when Fitch Ratings cut its rating on the state's general obligation debt to just two notches above junk status.

Fitch cut its rating on California's long-term bonds to "BBB," two notches above speculative grade, citing the state's budget and cash crisis. The state last week started issuing "IOU" promissory notes to pay for some bills in order to conserve cash.

The credit rating agency also kept the debt of the most populous U.S. state on watch for additional downgrades. California ranks as the lowest-rated state general obligation credit by Fitch, followed by Louisiana, at "A+."

Tom Dresslar, a spokesman for State Treasurer Bill Lockyer, said the other two main credit rating agencies, Standard & Poor's and Moody's Investors Service, could soon follow Fitch's example. "I'm sure their patience is not deep," he said.

Lower ratings threaten to raise California's borrowing costs during a severe cash crunch in Sacramento, the state capital, one of Fitch's top concerns.

"The folks who are going to end up paying the price are not investors, not the governor, not the legislature, but the taxpayers," Dresslar said.

Standard & Poor's has California's general obligation bonds rated "A" with CreditWatch with negative implications. Moody's has warned of a possible "multi-notch" downgrade in its "A2," sixth-highest investment grade credit rating of California's general obligation debt.

In a statement, Fitch said it cut its "A-" rating "based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis."