California's Bonds Are Riskier Than Kazakhstan's

The Financial Times has an article today about how the Treasurer of the State of California, Bill Lockyer, wrote letters to Goldman Sachs and other investment banks earlier this week angrily decrying their marketing of credit default swaps on California's debt in a way that branded it riskier than that of the nation of Kazakhstan.


"On paper," the article reads in part, "California's debt of $85bn supported by 37m citizens and the world's eighth largest economy looks more manageable than Kazakhstan's near-$100bn heaped on its poorer population of 16m. Go beyond headline figures though and Kazakhstan, with the world's 11th largest oil reserves, an economy that grew more than 8 per cent annually from 2002 through 2007 and unemployment of just 6.7 per cent looks positively vibrant next to the Golden State's joblessness of 12.4 per cent."

"But such head-to-head comparisons do not even begin to spell out the relative woes of American states compared to many developing nations. In addition to their headline borrowings, equal to nearly a quarter of national output, states and cities have made billions more dollars in promises to current and future retirees. Pensions are nominally underfunded by an already scary $1,000bn according to the Pew Center for the States, but that uses their own rosy actuarial assumptions. Former Social Security administrator Andrew Biggs reckons the shortfall would be up to $3,500bn if calculated using a more conservative private sector methodology. Tack on another thousand billion or so for unfunded health benefits and America's states appear to have dug a hole so deep no amount of austerity could fill it."