After Obama changed the law so Puerto Rico could enter bankruptcy (thus shafting bond holders, but hey, that’s what Socialists do…) it was only a matter of time. The island has now officially entered bankruptcy court.
I’ve talked about Puerto Rico before:
When their “State Run” electrical system went dark:
Yeah, it is called a “company”, but…
Some details on the economy and POV from during the elections:
Including descriptions of the flood of Puerto Ricans heading to Florida and abandoning their home. Seems that applying a mandatory high Federal Minimum Wage Law to a tropical island surrounded by much lower wage rate destinations isn’t such a good idea after all…
Some comparative debt load and response review here:
I won’t rehash all that here. The thumbnail sketch is “the typical”. High tax rates supporting an ever increasing government bureaucracy with nice fat pensions slowly crushing the private sector profit making sector. Then layer on lots and lots of debt as a way to grease those skids to hell and not notice the pain until the final death rattle comes. (Pain is a valuable thing. It tells you to STOP doing something before it gets too bad…)
Eventually the debt become unrecoverable and the final spiral into collapse comes. Puerto Rico is there now.
The only things that really make this one any different from the dozens from South America over the decades or from Europe, pre-Eurozone, for that matter is that the legal structures are set in Washington DC. And like the EMU zone now, Puerto Rico can’t just bugger the currency.
Bonds were sold under an “impossible to go bankrupt” law, then the law was changed. You would think that was a kind of fraud, but it is done by Senators and US Reps, so just “normal business as usual”… This “impossible to bankrupt” was used as a selling tool to load up the mainland with P.R. Bonds. Hey, “Fleece the Rubes” is also “business as usual” in the “securities” business. The government of P.R. seeing an easy touch cash cow went whole hog for debt, who cares about 10 years later when it comes due, I’ve got an election to win NOW! As all politicians do. A match made in the heaven of D.C. Win-Win-Win… until the due date. Season with P.R. being on the $US so no way for the typical sovereign debt repudiation of buggering the currency with inflation. Then frost the top with the Congress adding an application of the mandatory Minium Wage Law. What could possibly go wrong with forcing the same minium wage rate that is set for New England and Las Vegas onto an Island in competition with the likes of Haiti and Jamaica both for jobs and for tourists.
It’s a Progressive Liberal Socialist Dream Come True! Just jack up real wage rates, screw the employers, have the government use debt to ease the pain of any friction and give fat retirement packages out like candy to anyone connected to the scheme…
The only problem is that the real costs drive away real industry and real jobs making real things. The basic economy starts to lock up, employers leave, property values drop, unemployment rises, and suddenly you have a giant debt Ponzi Scheme to cover all those loverly pensions… Ooops.
How to fix it? Well, first they need to get out of the Debt Death Trap they are in. The bankruptcy court will do that. The longer term fix will be harder to come by.
First, it is essential to let real economics laws operate. Take that Federal Minimum Wage foot off their throat. They may start as low paying jobs, but there WILL be jobs, and real productivity and real income and real growth. Competition will eventually raise wages to their equilibrium point. Second, stop applying the Jones Act to them. Let their ports handle goods and ships from anywhere. That will at least cut the costs for average folks on the island. Let their economy compete directly and freely and it WILL thrive.
As to the debt?
So the question really is who gets screwed. The bond holders, the US Taxpayer, or the financial companies. (It ought to be the folks who issued the bonds, but that is the purpose of bankruptcy, to let them off the hook for their debts.)
At this point IMHO there ought to be a claw back of earnings from any company that pushed P.R. Bonds as impossible to bankrupt (so ignore the bad fundamentals). The bond holders knew they were buying something not-AAA Federal Paper, so need some haircut (especially any vulture funds who already scammed the original holders buying them for pennies on the dollar). The US Taxpayer? Well, despite my usual “NO!” to Soaking Uncle Sugar: In fact, the US Congress made this mess by application of laws to promote some broken sense of “social justice” and force Jones Act wages on shipping and Federal Minium Wage onto a place that can’t support it. They, too, are liable. Now in an ideal world, we would have a claw back of the pensions of anyone in Congress of Federal Executive levels during the years the debt built up, but that’s not going to happen. So at least some can come from “tax the rich” and pay off some P.R. debt with it.
IMHO, the best way to cover that is simple: Pass a bill removing Federal Minimum Wage and Jones Act (and any other crap progressive socialism lite laws) from applying to Puerto Rico, and in it, include a provision that the USA will “roll over” the existing PR debt. Bond holders take a small haircut (maybe 20%) and the Puerto Rico agencies are also kept on the hook for a portion (say 10%? Whatever looks doable in bankruptcy court). Any Puerto Rican Government Executive takes a 50% haircut on their Government Pension (no such rule applied to non-management personnel). The USA picks up the rest of the debt and pays off the bonds, while issuing US Debt (at near zero interest rates right now), but with Puerto Rico to repay the principle to the US Treasury as they mature. Say a ladder of 2% every year for 50 years or 4% every year for 25 years. No more debt to be issued by Puerto Rico until this is paid off (preventing a repeat…)
Here’s some background on the PROMESA legislation (Part of the Obama Legacy…)
This bill applies a form of Chapter Nine bankruptcy to the general obligation bonds of Puerto Rico that are guaranteed by the commonwealth’s constitution.
Article VI, Section 8 of Puerto Rico’s constitution explicitly provides that “interest on the public debt and amortization thereof shall be paid first.” PROMESA ignores the Puerto Rican constitution and breaks that promise.
Here’s why this is so important to the rest of the country. Every state government has similar constitutional provisions that guarantee their general obligation bonds. This is what allows them to borrow at extremely low interest rates, because their debt is constitutionally guaranteed and therefore the risk of default is extremely low.
If Congress is willing to undermine a territory’s constitutionally guaranteed bonds today, there is every reason to believe it would be willing to undermine a state’s guarantee tomorrow.
This, in turn, invites credit markets to question such guarantees as being no longer secured on constitutional bedrock, but rather dependent on the shifting whims of Congress. And this, in turn, means the value of those bonds is devalued and interest rates paid by taxpayers on that debt will increase.
The governors of six states have already raised this warning. And the U.S. Virgin Islands, whose credit is directly undermined by this bill, wants out of the bill for that reason.
PROMESA could have respected the $18 billion of constitutionally guaranteed debt and focused instead on restructuring the $54 billion of Puerto Rican municipal debt that is not constitutionally guaranteed. After all, there is no reason to treat San Juan’s municipal debt any differently than San Jose’s. But constitutionally-issued debt is fundamentally different, and its reliability must be maintained. Tellingly, supporters of the bill voted down just such an amendment in committee.
Well, at least now we know that State and Territory Constitutions are meaningless and ALL “Municipal Debt” is now junk at its core, legally.
So just like Detroit and soon California, excess debt leads to financial ruin. You can not borrow your way to prosperity. You can not legislate your way there with wage laws and sweetheart deals to unions like the USA Maritime unions.
It is worth noting that these same forces are what is at work in Greece, Spain, Italy, etc. etc. Locked into one currency, so they can’t inflate their way out of debt; or out of nutty mandated wage rates. Tied to ONE legislative agenda set far far away and beyond their control. Increasing unemployment as they get defined into poverty for the benefit of the Central Planners. As their economies implode (accompanied by debt explosions), their youth moving away to other cities in other nations where high cost of living makes the high wages more rational; but where they still don’t thrive.
Just like Detroit became a rotting cancer, so too will the cities of Greece et. al. as the economic rot forces decay. An independent nation could fix that by several means (currency inflation, less debt, lowering wage rates, etc.) but a satrapy is limited by what the Master allows. Typically that is decay of infrastructure, lack of investment, population exodus, and eventual dependency as a poverty ridden colony.
Free people can turn anywhere into a great place to live. (Look at Phoenix Arizona. Built in the worst possible place in the middle of one of the more savage deserts on the planet, with nearly no natural advantages. Just a small water supply, and lots of sand. Add nuclear power and you get a retirement mecca… Add computer centers using that cheap nuclear power and you get one of the major financial computing centers of the continent.) A dependent people living by Social Ideals & Laws Imposed By Others and then buried in debt is a doomed people, no matter how rich in natural beauty and resources the rocks they live on. Central Planning always plans for the Center to Thrive – everyone else not so much.
By Thomas Heath and Tory NewmyerWashington Post
Puerto Rico teetered into insolvency Wednesday as the chronically troubled U.S. territory of 3.4 million citizens buckled under its ever-increasing debt, which stands at $73 billion.
The process that Puerto Rico has undertaken is a prelude to bankruptcy, but in this case it is tailored for governments. Given the size of the debt, it would be the largest such insolvency in U.S. history, far outstripping Detroit’s $18 billion restructuring in 2013.
Puerto Rico’s situation is not dissimilar to Detroit’s, which was the culmination of years of economic stagnation and bad policy. Puerto Rico, an island in the Caribbean that is about the size of Connecticut with half its gross domestic product, needs billions to stimulate its economy and upgrade its infrastructure, including its water and electrical delivery systems as well as waste collection. Both also face massive pension obligations.
So where did the prior $72 Billion go? Hmmm? Perhaps also spent on ‘infrastructure projects’ and to “stimulate its economy”? It is NOT a stimulus to the economy, it is a funnel for Friends Of Government to get rich. What stimulates an economy is economic freedom and low tax rates.
A seven-member federal oversight board set Wednesday’s events in motion when it filed in U.S. courts to place the territory under protection from a growing avalanche of bondholder lawsuits.
The oversight board was empowered under legislation known as the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, to submit a plan to a court with the power to impose a settlement. A bankruptcy judge is expected to be appointed to oversee the process.
Investors had bought the bonds in the belief that Puerto Rico, like U.S. states, would not be allowed to fail and the debt would be protected. But many of the agencies that have issued government debt in Puerto Rico missed payments, putting them in default.
I only note in passing that these were likely bought by the present fund holders at distressed prices from the original small holders, so sob stories about poor mainland pensioners living on their Puerto Rico Bonds are likely a farce. Who will make whole the already fleeced small holders who sold to these Vulture Capitalists? Eh?
A maze of government-issued bonds through various taxing authorities and revenue streams complicated attempts by Puerto Rico to settle with bondholders.
“The complexity of Puerto Rico’s debt, with multiple types of debt and classes of shareholders, make voluntary negotiated settlements more difficult,” said Andrew Biggs, a resident scholar at the conservative American Enterprise Institute and a financial oversight board member. “It’s possible that the prospect of legal adjudication will put new energy behind a negotiated settlement.”
Rep. Nydia Velázquez, D-N.Y., who was born and raised in Puerto Rico, said that thanks to the law, the territory has the tools it needs to climb out of its crisis. “It is time for the government and the creditors to move forward in restructuring the public debt,” she said.
It is unclear how much will be paid to holders of Puerto Rican government bonds. The territory had planned to cover less than a quarter of the debt that is due over the next 10 years.
A coalition representing a third of Puerto Rico’s senior secured bondholders, with $2.5 billion at stake, applauded Rosselló’s move, calling it “sound public policy and … a much-needed step forward on the island’s path to restructuring its debts in an orderly manner.
“This was certainly an option of last resort,” according to the group, which includes retirees, investors and asset managers such as GoldenTree Asset Management, Merced Capital, Tilden Park Capital Management and Whitebox Advisors. “The move enables Puerto Rico to freeze numerous lawsuits, maintain essential services for its residents, and rely on a court-driven restructuring process to objectively determine respective creditors’ rights.”
Nader Tavakoli is the former chief executive of Ambac Financial Group, a large insurer of Puerto Rico debt. “A long and drawn-out battle with creditors will be catastrophic for Puerto Rico and its people,” he said. “It’s difficult to see how Puerto Rico will have access to the large amounts of affordable capital needed to revitalize the island without consensus with its existing creditors.”
In other words, get Sugar Daddy to pay off the credit cards and guarantee the new debt, then start the cycle all over again…
Unsecured creditors and junior bondholders have taken significant losses in past restructurings, such as in Detroit, and are probably more vulnerable to large losses in Puerto Rico.
“Puerto Rico’s bankruptcy is unique in size,” Williams said. “But it’s not just the size of the problem that is unique. It was the long-standing absence of a legal path for restructuring its debt that contributed to this.”
President Barack Obama signed the PROMESA legislation over the summer as the territory’s financial situation grew dire and the economic death spiral took hold.
The Obama Legacy lives on. No bankruptcy for GM (that would NOT have ended the company, just passed ownership to the bond holders) but plenty of bankruptcy for a State, City, or Territory? Guess that’s the Socialist Way. As long as governments and unions win and capitalist bond holders lose.
The island territory, 1,500 miles from Washington, saw its population plummet to 3.4 million from more than 5 million. Its economy has withered, its debt has mounted, and the unemployment rate has settled into double digits. The territory’s agriculture department suspended subsidies to farmers. Businesses experienced power failures from the state-owned utility. The treasury withheld tax refunds.
That’s pretty much how it goes when you can’t cut your cost basis. No ability to change the currency (the usual way bad governments repudiate debt in real terms), no ability to change the exchange rate (thus moving from artificially high political wage rates to real competitive wage rates compared to other neighbors), no ability to remove the excess debt overhang indulged in by their “Political Leaders”. AND subject to all the legal red tape of the USA Congress and national laws…
The rescue plan involving the oversight board was fraught with politics as it wound its way through Congress last year. Some politicians used politically charged language to describe the plan.
One group, the Center for Individual Freedom, spent millions on ads calling the Puerto Rico bill a “bailout,” targeting congressional districts. As Jeff Mazzella, the group’s president, sees it, the oversight board’s action “will allow Puerto Rico to rob millions of American retirees and savers who invested in Puerto Rico bonds.”
“Furthermore,” he said, “it cements the political precedent set by Congress for high-spending states with unsustainable debts to ultimately follow suit.”
And, I would add, for the USA to do the same when the time comes… Though really why bother? We’ll just crank up the inflation rate and let it melt away in real terms… Oh, wait, we’re already doing that…
Well, I hope that in some way or another Puerto Rico gains enough liberty to thrive. I’d love to vacation there, and might even enjoy some retirement time there. At present, the medical staff are bailing for better wages and jobs on the mainland (along with the young and future “human capital”) so not with the best health system for retirement living… but maybe after a couple of years of ‘turn around’. The place can be a wonderful tropical paradise, with the right liberty and laws…