Calif. borrows $5.4 billion amid U.S. debt drama

@CNNMoney July 26, 2011: 5:58 PM ET

NEW YORK (CNNMoney) -- California secured a $5.4 billion loan to see it through the financial market turbulence that could hit if federal policymakers don't solve the debt ceiling impasse by Aug. 2.

Eight major financial institutions, including Goldman Sachs (GS, Fortune 500) and Wells Fargo (WFC, Fortune 500), put up the funds, which will help the state with its daily cash flow needs. Also, the money will cover California in case the federal government delays payments for services such as health care and transportation. (States brace for U.S. default)

"California had to obtain this interim financing to protect the state from the immediate, drastic consequences of a failure by Washington to resolve the debt ceiling impasse by the Aug. 2 deadline," said Treasurer Bill Lockyer.

The state had planned to issue $5.4 billion in short-term debt in late August, but opted instead for a bridge loan in case there is a federal default. Lockyer plans to issue the debt eventually and use the proceeds to pay off the bridge loan.

States around the nation are drawing up contingency plans in the event that federal policymakers don't resolve the debt ceiling impasse by Aug. 2.

They are preparing for chaos in the municipal debt markets and delays in federal payments for Medicaid, education and other services, which could happen if the federal government defaults on its obligations. To top of page

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