California’s debt rating was slashed by Fitch Ratings to triple B – two notches above junk – after the state was forced to issue IOUs for certain payments while it frantically tries to agree a budget.

Further downgrades are possible, Fitch said, if legislators and Arnold Schwarzenegger, governor, do not end a stalemate over how to close a $26bn budget gap. “This underscores the urgency to solve our entire deficit,” Mr Schwarzenegger said.