If the stigma of issuing IOUs triggers a budget deal in the coming days, Gov. Arnold Schwarzenegger might find redemption in his strategy of quashing a stopgap solution that would have avoided those non-cash payments.

But if no budget deal emerges soon, Schwarzenegger will have helped saddle the state with a lower credit rating and have nothing to show for it.

As a negotiating strategy, Schwarzenegger is counting on public pressure to mount against the Legislature as California issues IOUs today for only the second time since the Great Depression. The Republican governor could have backed legislation to avert IOUs this week, but he demanded that lawmakers solve the entire budget problem, which grew Wednesday to $26.3 billion.

The state plans to begin paying local governments, businesses and taxpayers with IOUs – formally called registered warrants. The move will hurt the state's already dismal credit rating and incur high interest costs, all the while highlighting California's fiscal failure.

Schwarzenegger and lawmakers alike sought to reach a complete $24 billion budget deal by Tuesday. But as it grew clear how far apart Democrats and Republicans were on taxes and spending cuts, lawmakers fashioned a smaller solution to cut $3.3 billion in school spending that would have preserved enough cash to allow the state to pay its bills.

The governor didn't buy it, however. He enlisted support from Senate Republicans, who ultimately blocked the stopgap plan from reaching his desk.

Schwarzenegger wanted a full budget deal, and part of his calculation was likely that IOUs ramp up the stakes and force lawmakers to reach that goal sooner. Without IOUs, he figured lawmakers might have delayed compromise on the rest of the package, costing the state in a different way.

"If he had signed the stopgap measures, the Legislature would have gone home for Fourth of July weekend and come back when the threat of IOUs came up again," said Tim Hodson, executive director of the Center for California Studies at California State University, Sacramento. "I'm sure the governor went over this and thought: Are the consequences of the delay worse, and would he have lost the leverage that he has now?"

While the governor may hold out hope for a better negotiating environment in July, relationships among leaders were strained Wednesday.

Schwarzenegger's refusal to agree to a stopgap plan sent lawmakers a signal of his distrust. Senate President Pro Tem Darrell Steinberg, D-Sacramento, emphasized over the past week that averting IOUs would not have dampened his efforts to seek an overall budget solution and implored the governor to work with them "in good faith."

Steinberg and Assembly Speaker Karen Bass, D–Los Angeles, essentially asked Schwarzenegger to trust them. They promised the governor on Tuesday that they would work with him in the next two months on his proposals to change state government permanently if he'd back their stopgap plan.

Their concern was not only triggering the IOUs, but also losing the opportunity to cut the 2008-09 education budget. The deficit grew by $2 billion overnight when Senate Republicans and Schwarzenegger blocked their education cuts.

After Steinberg blasted Schwarzenegger's stance Tuesday as possibly "the most irresponsible act I have seen in my 15 years of public service," Bass was incensed Wednesday.

"He broke it, he should fix it," Bass said curtly after a meeting with Schwarzenegger. "I have nothing else to say."

The governor showed little love for Democrats on Wednesday, either.

He said they wasted the month of June – and then he tried to embarrass lawmakers for debating a bill that would prevent the amputation of cow tails. The governor not only highlighted the bill at his news conference but had an aide shoot video of lawmakers testifying on cow tails Wednesday, which he posted on YouTube.

"Right now, in the midst of a budget crisis, they are debating about cow tails, and I think that this is inexcusable," Schwarzenegger said. "I mean, how do they explain this to the California people, that in the midst of the biggest budget crisis we are having a debate about cow tails?"

Steinberg said Wednesday that "there have not been any breakthroughs, but there's certainly an urgency, and it's obvious that sides have put their flagpole in the ground."

In the absence of good will between the governor and lawmakers, all the state may have left is the sense of urgency created by IOUs.

"There was a certain amount of denial," said Assemblyman Jim Nielsen, R-Gerber. "Reality should have hit May 19th (after the special election), but if it didn't, the second train just smashed through the Legislature last night. I hope that gets everybody's attention."

Democrats felt the same way about their Republican counterparts and particularly Schwarzenegger. Assemblyman Alberto Torrico, D-Newark, said, "I hope the IOUs sober the governor up. He's going back to his old tricks, leveraging major policy changes into budget negotiations."

But it's not clear that IOUs are sufficient to force lawmakers to close a deal, said Joe Mathews, Irvine senior fellow at the New America Foundation. He said Schwarzenegger and legislative leaders are mostly lame ducks. And legislators of both parties can dig in their heels because they are protecting the constituents they were elected to represent. He said federal intervention of some sort may be necessary.

"I don't know if there's anything that can force these guys to close," Mathews said. "Fatigue and frustration seem to be the biggest things."

Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548. Jim Sanders of The Bee's Capitol Bureau contributed to this report.