California could be on the brink of an economic crisis, according to the LA Times. The paper is reporting that Governor Arnold Schwarzenegger has warned Treasury Secretary Hank Paulson that his state may soon need a US$7.0 billion emergency loan from the federal government to meet payments to state entities such as schools.

The LA Times goes onto say that the state has never needed such a bailout, and that the only other such rescue to have taken place in the US was that of New York City in 1975, when the city neared bankruptcy. Earlier this week, the California Treasurer was quoted as saying that the state’s cash reserves may run out by the end of October. I note that California’s 5-year credit default swap spread is currently trading at 93.5 basis points, which is wider than all of Europe’s developed economies.

Any economic crisis in California would be highly significant, given that it is the US’ most populous state (36.55 million people, or 12% of America’s total) and the largest economy within the union. Indeed, if it were a country, California would potentially rank in the G7. I also note that California is vulnerable to the economic slowdown in Asia, since around 40% of its exports went there in 2007.

So, is Arnold Schwarzenegger about to be Terminated? Probably not. His gubernatorial term runs until the start of 2011 and he is not eligible for re-election, so it is his legacy rather than his position which is at stake. He has already had to deal with California’s longest-ever deadlock – of 85 days – over the state budget, which was finally signed into law on September 23. However, he has two years to recover should the state go through an economic crisis. The irony is that Schwarzenegger came to power in 2003 after his predecessor, Gray Davis, was recalled from office amid a mini-economic crisis. At the time, some commentators noted how Schwarzenegger was coming to the state’s rescue as he did in his 1987 film, The Running Man. In the movie, he portrayed a reformed paramilitary police officer who sought to overturn social injustice and media censorship in a chaotic California of 2019 characterised by economic ruin and food riots. While California is unlikely to descend to such levels any time soon, there are still 11 years to go until 2019.