Puerto Rico's Sovereign Debt Crisis

Yes, Rey. That was one of the articles I read a couple days ago.

As you know, I have been investigating and following this issue since May.

I just found this video from Democracy Now! on the protests regarding the unelected control board for Puerto Rico. The man they interview, Saqib Bhatti, has some very interesting information on the "legitimacy" of Puerto Rico's debt and Wall Street's gouging of Puerto Rico.
Puerto Rico's Unelected Control Board

I'm afraid your link doesn't show up, boricanroots :(

Sorry, try it this way.

Very interesting, thank you, food for thought.

Things are getting a little heated with the protect against the control board. There was a scuffle and some people were arrested. They blocked the road in Condado. Of 600+ people that were invited to participate in a forum about the PROMESA legislation, only about 135 were able to attend the conference and those were escorted in by the police after pushing people out of the way. So the conference was a royal mess. There are still protest at the Hato Rey federal court and another scuffle when somebody took the phone of one of the protesters to keep them from video of the going on. It was recovered and the police was criticized for not helping the protesters when the individual stole the phone, and for making it difficult to file a complain.

As times passes things may get a little ugly.

I spoke to a few of the locals down there on a blog and was told that the "protestors" are the same group that protest anything and everything, "like it's their job or something", and that nobody really takes them all that seriously.

I did think the first part of that link showing a video of the protest to be a bit biased.

Thanks for sharing!

Not surprised that the protesters were "professionals".  It's all too common.  Disappointing, but not surprising.

I agree that the video demonstrates a substantial bias.  That's also all too common today.

The real problem is that the debt crisis is a legal and financial issue, and those are very complicated. It is much easier to simply turn this into a partisan issue, proclaim that my partisan side (whichever it happens to be) are the "good guys" while the other side are monsters.

As a legal issue, much of what will happen to PR turns on interpretations of federal bankruptcy law.  In that law, states are prohibited from filing for bankruptcy, though "municipalities" may file for bankruptcy.  This is one reason why Detroit has access to bankruptcy proceedings (chapter 9), but not Illinois.  Under most federal law, PR is treated as a state, but under bankruptcy law, it is not.  Thus, PR cannot restructure it's debt, nor can PR's municipalities. without amending federal bankruptcy law.  Even with that amendment, only municipal debt could be restructured.  This means government-obligated bonds are outside of chapter 9 bankruptcy.  In all likelihood, GDB debt would also be outside of bankruptcy.  That's a huge chunk of total PR debt.

Lastly, there's also a constitutional issue involved, the "contracts clause."  Here, the U.S. Constitution forbids states from taking actions which interfere with the performance of contracts.  Defaulting on bonds is by definition, the non-performance of a contract.

Sorry if this is a bit technical -- I promise I've made it as short and simple as I can.  The crux is that this is not a simple matter, and shouting at the "bad guys" isn't going to fix the problems.

Can't get away from the professional protestors! ;) For me,  the kind of debt that PR is saddled with was most interesting. The cycle of robbing Peter to pay Paul gets you every time.

One piece of information. The part about having to pay debt first before other obligations like feeding the people, was inserted into the PR constitution by the then US goverment, it was not at the request of the Puerto Rican people. Like all laws, somebody always insert something that you do not like but you have to vote on the entire package or vote the entire constitution down, which in 1952 it was not going to happen.
Just passing information.

Exactly, which is how the 2009 loop hole, Saqib Bhatti was discussing, allowed them to incur the type of debt that could be labeled "illegitimate". To me, it is very reminiscent of the 2008 collapse and what we learned AFTER everything fell apart.

For good or evil, the board has officially take over the government finances and most of the other institutions like electric, water, coops, pension plans and many others. Governor has a voice but no vote and the current goverment in PR will be required to pass laws and change laws that the board deems necessary. No real choice here. If this is good or bad we will know in a year or two, The board is to stay in place for a minimum of 5 years or longer if they do not accomplish all that the board needs to do like a balanced budget and return to the market, The level of pain to reach these goals is unknown at this time as we do not yet know how they plan to accomplish those goals.

Article here: … smsnnews11

Yeah, we don't know yet how the board will do but it's unlikely if not impossible that they'll be worse than the PR governments who got us in this mess.
I'm sort of optimistic that they - not being members of local political parties - will (try to) do what's good for Puerto Rico.
Let's wait and see..

Hard to say how it will go, the fear is that they will strip PR to pay the bond holders and allow all sorts of permits and sale of natural resources to pay the bond holders. The current politicians will rather allow the death of their children than loose money that they can steal from the country.
Neither sounds too good, fingers crossed.

I imagine that what they will do is look at both income streams and debt obligations, and do what they can to bring them into the black.  What might be done to increase public revenues in PR?  In truth, I don't expect much here -- given economic realities it is difficult to raise utility rates or taxes on the many who struggle to pay them already.

So what of the debt obligations?  Those bondholders are at the top of the list of folks who should be paid, legally speaking (and I would argue practically speaking as well).  They loaned their money to PR at low rates.  They agreed to such low rates because the PR government guaranteed the loan.  PR is obligated by law to honor those bondholders.  Now, not all government bonds have that guarantee -- and those without the government guarantee may well find themselves out of luck.  They invested in riskier instruments for higher rates, and sometimes those simply don't work out. 

As far as public pensions, my understanding is that PR is not legally (or constitutionally) bound to honor those pensions.  Many states are suffering from these underfunded pension obligations, and some of those states are bound by their state constitutions to honor them.  I don't believe PR is so obligated.  Nevertheless, she should take care to honor those promises as much as possible. 

The last and most flexible source of debt for PR is public employees, and my prediction is that it is in the area of personnel that we will see the most immediate and most significant cuts.  Unlike the pensioners, the public employees may find alternative employment, even emigrating to do so.  But my guess is that these former public employees will simply draw unemployment benefits for as long as possible, transferring, at least in the short term, their livelihood from the PR government to the federal government.

One thing is for sure, if they are going to make life harder for the Puerto Ricans with a low income, even more people will pack and go to the mainland.

Although I don't want to leave and we won't as long as we can survive here, if things will get worse we'll end up in North Carolina where my stepson lives. He's been telling us more than once to pack and come to NC..

While the government is big in PR, as in most companies they are likely not the number one waste of funds, bad contracts and stealing from the system is a bigger saving, however I agree we do have to cut the size of the government, but we must go legally after all the corruption and after the properties of those that are corrupt. If you want to hurt them, take their new houses, boats, bank accounts, and other property that they could not have gotten with their salary. Hurt them where it hurts and sell all their ill gain stuff.

The more people that leaves the less taxes there are to recover, so eliminating the things that are causing people to leave and creating good paying jobs is the way to recover the economy both short and long term.

As to bonds, lets investigates which were illegally issued, truncate those to zero and lets pay the rest. Some of those bonds were purchased at cents on the dollars, with the economy the way it is, I do not see paying a dollar for a bond that was purchased for 20 cents. Most of the real loses have already occurred when people started getting rid of the bonds, I could be wrong but as I hear most (not all) of what is outstanding is held by the carion feeders.

Of those employed in PR, nearly one in three works for the government.  On the mainland, state and local government employs, on average, 14.2% of the workforce.  Wyoming employs the largest proportion, at 22.4%. 

Clearly, there is bloat in Puerto Rico's public payrolls.  On top of that, the government is incredibly generous in employment benefits.  Public employees receive 30 days annual vacation, 18 days of paid sick leave, and 14 paid holidays -- roughly 1/5 of each year can be paid time off.  And this does not include benefits such as maternity leave (60 days).  What business is so generous?  Indeed, I don't know of any state that is so generous.

If business is looking to cut costs, quite often the first place cuts are made is in payroll.   States do the same.

While you may be right that there is some corruption in the government - and wherever corruption exists it ought to be prosecuted - nevertheless I doubt that there is $70B in corruption, or that the seized assets of those convicted of corruption amount to $70B.

PR must shrink its payrolls (and likely reduce its generous benefits).  There's no other way to bring its books into balance.  And yes Gary, things will get increasingly difficult for the average and the struggling Puerto Rican, who will likely find the prospects better on the mainland.  I fully expect emigration to continue at or above current (alarming) rates.  I agree that growing the economy grows the tax base and the tax receipts.  The problem is how you grow the economy with $70B debt, and 1/3 of the employees are paid from tax dollars.

Bonds don't quite work the way you suggest.  If I buy a government-backed bond, I will pay "pennies on the dollar".  For instance, I may pay $0.95 for a $1 bond (the nickle is my expected return).  If however, I fear that the government may default, I can sell the bond to someone else, who may pay me $0.90 for it.  I've lost a nickle on my investment, and the new bondholder hopes to make a dime.  The trade of bonds, and their fluctuating price, reflects perceived risk.  However, regardless of who now holds the bond, if PR pledged to pay the face value when it offered the bond, it should honor that promise.  Failure to honor the promise means that no one will loan Puerto Rico money again.  Good luck getting the economy going with no access to credit.  Alexander Hamilton understood this in 1790 when he argued that the new US government should honor the debt of the former government, and of each of the states.  The US needed to establish a good credit record.  Puerto Rico needs to re-establish that record.

I'm looking to retire in PR, because I am intoxicated by the people, by the climate, by the geography, everything.  I am aware of the troubles facing Puerto Rico and Puerto Ricans.  It is true that these troubles advantage me, as bankruptcy and emigration drive property values down.  I'm not interested in PR because it's a bargain, but it does become more attractive for folks like me.  And though I'm not a wealthy man (I'm a poor college professor), I'll be able to live on my investments.  In short, PR's troubles will drive many with only modest means from the island, while attracting more folks like me, who can contribute to the local economy and afford to pay for public services.  My hope is that this can be accomplished without damaging the local culture. and that the local economy can right itself quickly enough to bring the emigrants back home.

Agree government has to be cut down and the inefficiencies eliminated. No problem with any of that!!!!!

But there are no 70 Billion in cutting the government workers by even 1/2 to bring it to 15% in line with the states. Also you just lowered your income from taxes by probably 1/8 and only cut down the budget by less than 600 million. Most government workers make around 30 to 40k a year. Even the Mayors (73 of them) on average make 70-80k a year with maybe 5 exceptions that make more. All those cutting mean greater expenses in miSalud, since they will no longer have a health plan, and payments for unemployment and welfare will go thru the roof as an additional 40,000 join the ranks of unemployment overnight.

All of these, cutting the government, eliminating corruption, selling illegal assets, legalizing marihuana, privatizing AEE, etc, are all measures that will help in the long run, but even together they don't add up to 70 Billion savings in the next 10 years. Mean time more businesses will go out of business resulting in additional people out of work and less taxes being taken in since those out of work will cut down in expenses even further, this is spiraling out of control.

The latest budget for PR if I recalled correctly (without payments for bonds) is only 9 billion. Even if you cut it by 1/2 (services, payrolls, retirement, repairs, medical, etc) that is 4.5 billion and in 10 years if they were to freeze interest, that would still only amount to 45 billion. People would not go for that anyway and it will look like Venezuela with riots and massive marches.

My point is that the only way the debt can be payed without a revolution, is to basically pay 15 cents on the dollar (pay 17.5 billion only), maybe even less. The debt has gone too far for everyone to do ok even after major sacrifices. As is it stand the debt is completly unplayable in my opinion and as time goes on with people leaving the island there is less money to pay what has accumulated today never mind what it will grow in the future. There is not enough water in a stone no mater how hard you squeeze.

About 30% of the population depend on miSalud today that is the largest cost in the budget. if you cut that down you just affected over a million people in the island, expect at least 15 thousand of those protesting in the streets. That is a political disaster for the US with other countries giving the US hell about democracy, taking care of the elderly and the poor. I see one solution, some austerity combined with a cut on the debt by 85%. I accept that I may be completely wrong, but I do not see PR ever able to pay the debt with a reduction of the debt by less.

Oh there is certainly no way on Earth that all $70+ billion will be paid.  The fight is going to be over who gets paid how much.  As I said in my first post, government-backed bonds should be paid in full, while those without government guarantee should be paid at a discount.  Even this damages Puerto Rico's creditworthiness, but there is simply no way to pay those debts.  And by the way, the folks who wind up getting hurt by that are all of the people who have employer-sponsored retirement plans (aka 401Ks).  These funds are heavily invested in government bonds, and they will take the hit.  It's the American worker or retiree, for the most part, that will pay for PR's insolvency.

As for the public payroll, when you find yourself in a hole, the first thing you should do is stop digging.  I doubt that the payroll can be trimmed quickly enough through natural attrition and a hiring freeze, but if so, that's the preferable way.  I agree that cutting payroll alone won't balance the budget, and certainly won't pay off the debt, but that's where you should start.  The inefficiencies in PR's bureaucracy are not merely obvious, they are the stuff of legend.

In terms of cutting public benefits, MiSalud must be on the table as well.  Single-payer health plans are unsustainable -- all of the benefits lavishly promised by successive administrations will have to be slashed -- there's simply no way to pay them.  Yes, you are right that there's going to be tremendous protest.  The people have every reason to do so -- for decades they've been lied to, promised a plate full of  goodies for little or no cost.  But when the government is flat broke, there can be no more goodies.

Sadly enough, the emigration that I mentioned will ease the effect, as fewer demands are made for local benefits.  Not the best solution though, is it, making conditions so untenable that your worst net tax receivers all leave the island.

And of course, PR isn't alone in all of this.  A number of the states will soon face their own fiscal nightmares as the promises of their unfunded or underfunded pension systems, as well as the costs for Medicare expansion under the ACA all begin to come due.

Agree with most of the above, not agreeing that goverment back bonds need be payed in full. PR has no credit now, and it is not clear if the all the goverment back bonds are legal. I like them to be substantially cut also, not that it maters what I want.
I also agree that in the past Some 401k had a bond component based on PR, but a lot of firms have divested, there are still some but not like it was 3 years ago. Most took their loses already, 
But I am ok if we don't agree on that.

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