In a best-case scenario for CA, it could pay down its entire debt with IOUs. After that, its finances would somewhat improve because the IOUs pay (I think) thr

In a best-case scenario for CA, it could pay down its entire debt with IOUs. After that, its finances would somewhat improve because the IOUs pay (I think) three percent interest rather than whatever the bonds do. But then, imagine if the bond holders could sell those IOUs to California citizens for 99 cents on the dollar so that they could pay their taxes with them. The state would suddenly have its own paper on its books and would then need to borrow 26 billion dollars overnight, and the bond market would spank them. Of course, in that same scenario, they could conceivably just pay out the IOUs again, which is how a normal currency works. Taking them piece meal as taxes would do the same thing, more slowly.