Arnold Schwarzenegger faces the fight of his life. The “Governator”, best known for slugging it out in Hollywood blockbusters as an indestructible cyborg, displays steely confidence as he battles California’s worsening budget crisis.

As some of America’s biggest banks on Friday stopped accepting IOUs issued by the cash-strapped state in lieu of money, Mr Schwarzenegger defended his handling of the crisis and denied playing a high-stakes poker game with political opponents over California’s finances.

“It’s not about who blinks first,” he told the Financial Times in a Bedouin-style smoking tent outside his office. “It’s not a game of chicken.”

California, which would be the world’s eighth-biggest economy were it a country, began its fiscal year last week without a budget because of political gridlock.

Mr Schwarzenegger, its governor, is at loggerheads with Democrats in the state legislature who oppose making reform of the state’s welfare and social services system part of a budget deal. He insisted the changes were vital to keep borrowing in check.

Bank of America, Wells Fargo and JPMorgan had set a time limit on accepting the IOUs, which California has been forced to print as it faces a $26bn deficit.

But it emerged late on Friday that Citigroup had agreed to extend its deadline for accepting the IOUs until July 17.

Bill Lockyer, California’s treasurer, said: ”Citi made a difficult but responsible decision. As for the other banks, their refusal to continue accepting IOUs is disappointing.   I continue to believe they would better serve their customers and the taxpayers of California if they continued to accept the IOUs.”

That limit expired on Friday, raising questions over how much the IOUs are worth and how people will be able to cash them .

California is reeling from the collapse of the housing market and the economic slump. Unemployment is running at more than 11 per cent, well above the national average.