State Gets More Time to Avoid Default on Loan

California temporarily averted a costly financial problem Wednesday when negotiators persuaded a bank that lent the state $4.3 billion not to declare the loan in default until the end of the month.

Under the original deal between the state and a branch of JP Morgan Chase & Co., the investment bank could have declared the loan in default Wednesday because the state was to have approved a method of repayment by Oct. 10.

That would have forced California to begin paying JP Morgan roughly $250,000 a day in extra interest--and could have led to an erosion of the state’s credit rating. But state Finance Director Timothy Gage said the two parties agreed to extend the deadline to Oct. 31, though they did not change the loan’s escalating interest rates.

California took out the massive loan this summer to help finance the costs of the energy crisis until the state could float a record $12.5-billion bond issue, which was supposed to pay off the loan as well as reimburse the state budget for roughly $6 billion spent on electricity this year.

But the bond deal is now caught up in a disagreement between the state Public Utilities Commission and Gov. Gray Davis over how to address the financial toll of the crisis.

California Treasurer Phil Angelides has said it will not take place this year. If the bond sale does not occur soon, he said, California could face a budget deficit of as much as $10 billion next year.