The world’s eighth largest economy started issuing IOU (I-owe-you) vouchers instead of checks Monday as an ongoing budget battle and a 42-billion-dollar deficit left the state without enough cash to meet its commitments.

Governor Arnold Schwarzenegger ( kein economic girlie man !) was meeting with legislators in a bid to resolve the standoff that has prevented the state from passing a budget. State comptroller John Ching has warned that the state could completely run out of cash by the end of this month if a solution is not found.

On Friday tens of thousands of state workers will begin taking two days a month of forced leave without pay.

Insurers’ Corporate-Bond Losses May Exceed Subprime (Update1)

By Andrew Frye

Feb. 3 (Bloomberg) — Corporate debt defaults may cost U.S. life insurers “substantially” more than losses on securities linked to subprime, Alt-A and commercial mortgages, said Eric Berg, an analyst at Barclays Plc.

Corporate defaults are poised for a “significant” increase this year as the recession deepens, Berg, based in New York, said in a research note yesterday. The American Council of Life Insurers estimated the industry, led by MetLife Inc. and Prudential Financial Inc., holds $1 trillion in corporate debt.

“None of the life insurers we studied appear to be doing a particularly good job” of picking bonds backed by companies, Berg said. “Understandably, investors are concerned.”

Life insurers have plummeted in the last year in New York trading as investment losses and guarantees on slumping retirement products sap capital. Hartford Financial Services Group Inc. leads the industry with $7.9 billion in writedowns and unrealized losses tied to the real estate market since 2007, while New York-based MetLife has accumulated $7.2 billion, according to Bloomberg data.