This can’t be good.
A group of the biggest U.S. banks said they would stop accepting California’s IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.
The development is the latest twist in California’s struggle to deal with the effects of the recession. After state leaders failed to agree on budget solutions last week, California began issuing IOUs — or "individual registered warrants" — to hundreds of thousands of creditors. State Controller John Chiang said that without IOUs, California would run out of cash by July’s end.
But now, if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2, or find other banks to honor them. When the IOUs mature, holders will be paid back directly by the state at an annual 3.75% interest rate. Some banks might also work with creditors to come up with an interim solution, such as extending them a line of credit, said Beth Mills, a California Bankers Association spokeswoman.
Maybe the big banks are afraid they are undercapitalized and don’t want California’s IOUs because they think they are worthless. Fitch has downgraded California to near-junk status.
Note: I should point out an error from a previous post. I said that California IOUs would pay 5% interest. Unfortunately, they will pay only 3.75%…that is if they are paid.
Video of the whole we-bailout-receiving-big-banks-wont-take-IOUs affair is below.