California may seek $7bn emergency loan

Arnold Schwarzenegger, the California governor, has told the Federal government that upheaval in the credit markets could leave his state in need of an emergency $7bn (€5bn) loan to pay for public services such as law enforcement and hospitals.

California taps the credit markets around this time every year to raise "revenue anticipation notes", which tide it over until tax revenues arrive in the spring.

But with credit markets frozen, it does not expect to raise by the end of October sufficient funds it needs from investors this year, leaving it short of cash.

In a letter to Hank Paulson, US Treasury secretary, Mr Schwarzenegger said: "Absent a clear resolution to this financial crisis [the state] may be forced to turn to the Federal Treasury for short-term financing."

"The economic fallout from this national credit crisis continues to drain state coffers, making it even more difficult to weather the continuation of frozen credit markets for any length of time," he added.

Tom Dresslar, spokesman for the California Treasurer's office, told the Financial Times that the short-term bond financing was "typically a routine matter" for the state.

"We do this every year. But nothing is typical about 2008. We have this economic meltdown, the credit markets are froze. The situation has to change," Mr Dessslar said.

The financing difficulties facing California highlight what is expected to be a growing problem for US municipalities as they cope with an economic slowdown.

"What looked like a manageable economic slowdown for states now seems to be picking up momentum and could get a lot more severe," said Robert Kurtter, managing director in Moody's US public finance group.

Mr Kurtter said states under pressure include Florida and Nevada, which have been particularly hard hit by the housing downturn, and New York and New Jersey, which are grappling with cuts in the financial sector.

At least $12bn to $15bn in municipal bond issuance have been postponed since mid-September, said Matt Fabian, managing director at Municipal Market Advisors, a research firm that specialises in public finance.

Earlier this year, Moody's ratings agency said it had a negative outlook on US state finances based on anticipated lower tax revenues.

Source: FT.com