Watch California

As we go into the next phase of the financial crisis after the $840 billion bailout package was passed by the U.S. House of Representatives on 3 October, a few hints are emerging that one place to watch is California. The state has been struggling financially for some months with a deadlock on Governor Arnold Schwarzenegger's budget only just being resolevd, and it is the epicentre of the sub-prime mortgage crisis and house repossessions.

This story from MSNBC suggests that it may have troubles paying it state employees this month (picked up originally from Dollars and Sense):

Gov. Arnold Schwarzenegger and California's top finance officials reacted cautiously Friday to congressional approval of the $700 billion Wall Street bailout package.

They have been worried that the credit market will hurt the state's ability to get short-term loans to cover basic operating expenses, a step California takes each fall until the bulk of its tax revenue arrives in the spring.

Even with the bailout plan passing, Schwarzenegger predicted a difficult path ahead in the financial markets.

"California's not out of the woods yet," he said during a news conference in San Diego, noting that California soon will begin seeking loans on the open market. "It will be difficult. We will be going through challenges in the future."

He said he would convene a meeting on Wednesday with the four legislative leaders to discuss the state's financial situation.

While California seeks short-term loans every year, the situation is especially precarious this year because the nation's credit market has seized up under the strains of the housing-related economic meltdown and because state lawmakers delayed passing a budget for nearly three months.

The record-long budget impasse prevented the state from going to the bond market sooner.

On Thursday, Schwarzenegger sent a letter to Treasury Secretary Henry Paulson asking the federal government to protect California if the state is unable to secure financing for routine borrowing.

"Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing," Schwarzenegger wrote.

A spokesman for the state treasurer's office said pursuing a federal loan is just one option if the credit markets do not respond as Paulson predicted. California also will seek private loans within the next few weeks, spokesman Tom Dresslar said.

Unless it can secure those loans, the state is expected to run out of cash Oct. 29.

Earlier this week, the controller's office said California will need to borrow $7 billion to pay its expenses throughout the fiscal year, which ends June 30.

"We hope that (the bailout plan) will be sufficient to loosen the tight credit market so that the treasurer can issue the $7 billion we need," said Hallye Jordan, a spokeswoman for the state controller.