California's cash crunch: IOUs coming
..."The truth is that California is in a state of emergency," Schwarzenegger said in his State of the State address on Jan. 15. "The $42 billion deficit is a rock upon our chest and we cannot breathe until we get it off."
To conserve whatever cash remains to fund education and meet debt obligations, the state's controller plans to delay other payments or issue IOUs, which the state hasn't done since officials failed to pass a budget in 1992. This could mean thousands of businesses and millions of people will be left hanging until a budget plan is hammered out...
You know these IOU will be traded for $$ by desperate Californians.
Now the question is, $1 of IOUs will be worth what on the open market.
If the discount is big enough, it could get very interesting. But I have questions...
Are these things legally transferable?
Where does IOU holders rank in the creditor's queue?
What if these IOUs discount to face value gets really big? Payday loans in the US charge double digit % for even a few days of advance.
And if these discounts get big, are there arbitrage opportunity with other State of California related debt instruments?