Holy Borat! California riskier than Kazakhstan?

Has California reached a new low? The default risk on its bonds is now higher than that of Kazakhstan's.

By Jamie Dlugosch Jan 14, 2010 2:47PM

Sacha Baron Cohen as Borat (© Matt Sayles/AP)California may still have the 10th-largest economy in the world, but here's an interesting fact I caught in The Wall Street Journal today:

 

The Golden State's bonds are now riskier than those of Kazakhstan, home to crazy pseudo-documentarian Borat in a film of the same name.

 

According to CMA DataVision in London, it costs more to insure California debt than it does to insure debt from Kazakhstan, portrayed as a backward, dirt-poor Third World state.

 

Things aren't quite so clear on either front. We're not that bad, the Kazakhs said after film became a hit. And the Journal spends a good deal of time saying California isn't as bad as it might seem, either. But really, how in the world did this happen?

 

The answer is simple. Bondholders want to get paid back. The lower the expectation of payback, the higher the cost of the insurance.

 

So at least right now, with California’s budget a mess, Kazakhstan bondholders are more confident they'll get their money than holders of California bonds.


CNBC discusses California's debt rating in the video below. (Post continues after the video.)


 

Perception is a tricky thing, though, and one could make a strong case that the market for bonds is being inefficient here.

 

California has issues, but default seems unlikely. California quite simply needs to spend less while collecting more revenue. The problem is a political one and its government is in a stalemate, but that won’t last forever.

 

The bigger problem for California bond holders is inflation. If prices start rising, interest rates will go up and the prices of bonds will go decline. That's the way it works, and it presents a real risk for anyone considering any sort of bond at the moment.

 

Because of this, even Borat would know that owning stocks today makes more sense than bonds.

 

But given the size of California's economy, actually defaulting on bonds doesn't seem likely. I'm not quite sure why bond owners are higher on Kazakhstan. Perhaps because of this glowing depiction in its national anthem or at least, it's anthem according to the film:

 

"Kazakhstan is the greatest country in the world / All other countries are run by little girls / Kazakhstan is number-one exporter of potassium / Other Central Asian countries have inferior potassium / Kazakhstan is the greatest country in the world /"

 

Here is a free copy of my Top 10 Stocks to buy for 2010.

 

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