http://news.independent.co.uk/world/americas/story.jsp?story=420581

The state of California, as of midnight last night, was officially broke.

The richest, most populous state in the union - by some measures the world's fifth biggest economy - is facing a budget deficit of $38bn (£23bn).

Midnight was the nominal deadline for the state legislature to balance the books for the new budgetary year, which begins today. But the legislature, riven by partisan rivalries, including a vicious battle to unseat the governor just months after his re-election, never stood a chance of meeting it.

Worse, the longer the legislature takes to cure its financial headache, the bigger the deficit will become. It stood at $34bn two months ago; by the end of summer, it is expected to top $40bn. That is more than the budget deficits of all the other deficit-ridden US states combined. Since states, unlike countries, aren't allowed to run deficits, California is now facing the equivalent of the bailiffs coming around to impound the furniture.

Summer courses at community colleges are expected to be the first casualties. Then nursing homes. Then police academies. Tens of thousands of teachers who had hoped to be spared may now get laid off instead of squeezing under the financial limbo-stick.

This would be bad enough without the singularly tawdry politics behind it. In many ways, the situation is reminiscent of the 1995 stand-off between President Bill Clinton and the Republicans in Congress who preferred to shut down the federal government rather than sign off the White House's budget proposals.

But this time, the cast is more colourful, featuring a car alarm salesman from San Diego and the action movie star Arnold Schwarzenegger.

The Californian crisis is a fight in which everyone from the White House down has a stake. Republicans are crying foul about the corruption of de facto one-party rule by the Democrats; Democrats, meanwhile, are accusing the Republicans of attempting a bloodless coup to seize control in a state where they routinely lose almost every election.

California is in financial difficulties because of the slackening economy. But it has also suffered from very effective lobbying, over a period of decades, by anti-tax advocates who have placed strict limits on property taxes and required that any tax increase, direct or indirect, be approved by two-thirds of the state legislature.

That makes California's economy singularly inflexible: when times are good, the revenue rolls in but when they are bad there is almost no stability in the system.

Enter the Democratic governor, Gray Davis, first elected in 1998, whose popularity has plummeted because of the perception that he can't handle crises and has only one true talent: raising money for himself and scratching the backs of his campaign contributors.

Democrats and Republicans both hate him, but Republicans hate him more because he is in power and they are not.

Hence the campaign to have Mr Davis "recalled" - forced to stand in another election - just months after his re-election. (He won largely by default, since his Republican challenger, Bill Simon, ran a dismal campaign and came off even worse than Mr Davis).

The recall, which requires the signatures of about 900,000 eligible voters to get on the ballot this November, is being coordinated by an ambitious, rich Republican congressman from San Diego called Darrell Issa. Mr Issa is not exactly Prince Charming: he is too right-wing for the Californian mainstream and his brother is an acknowledged car thief.

Mr Issa has made better headway than expected, having collected more than 400,000 signatures so far before the deadline on 2 September.

But the big question is, what will happen if there is a recall election - a scrappy affair in which anyone can participate and the person with the most votes on the first round wins.

Mr Issa clearly wants to run, but many Republican strategists would prefer someone more palatable. The name that comes up most often is Schwarzenegger, who has name recognition galore even if he is an unknown quantity in political terms.

Suspicions are rising that the Republicans are refusing to agree to a budget on the theory that the worse things get for California, the better their chances of toppling Mr Davis become.

It's a strategy that is making some Republicans queasy: several have wondered whether the recall is such a good idea, and three of them signed an open letter to President George Bush at the weekend urging the White House to distance itself from the whole spectacle. California's economy, they wrote, was too important to become hostage to a democratically questionable political gambit.

Mr Bush, of course, knows a thing or two about bloodless coups, having been accused of staging one in Florida to enter the White House. For the moment he is saying nothing, letting California stew in its own juice a little longer before making his pronouncement.

TIME FOR AN ACTION HERO?

Will he run or won't he? As the momentum gathers to recall Gray Davis, California's unpopular Democratic Governor, the question on everyone's mind is whether Arnold Schwarzenegger will have the guts to launch a career in politics by running for the Republican Party.

Mr Schwarzenegger has made no secret of his ambition, and at 56 his days of macho posturing on screen are almost over. But there could hardly be a hairier moment to jump in, with the budget in tatters and state politics in turmoil.

In a dream scenario, Mr Schwarzenegger would sweep to power on a popular tide, end the partisan bickering, heal the budgetary wounds and cruise to re-election in 2006. On the other hand, it could all go horribly wrong.

He could be tainted by revulsion at the recall itself, or smeared by opponents (they say they can't wait), or outmanoeuvred by other Republicans jealous of his fame and resentful at his lack of experience. (His one big effort so far: sponsoring an initiative to fund after-school care programmes.)

To complicate the scene further, Mr Schwarzenegger is busy plugging Terminator 3, due out in the US this week. His final decision may be dictated by the success of the film. If it's a hit, he might think another payday for Terminator 4 is more attractive than digging California out of its holes.