Puerto Rico says it will default on Monday

[GennGreymane]

http://www.businessinsider.com/puert...default-2016-5

Puerto Rico is going to default.

In a television address made Sunday, Puerto Rican Gov. Alejandro Garcia Padilla said the island's Government Development Bank would not make a $422 million payment due to its creditors by the end of business on Monday, according to Bloomberg.

A Reuters report ahead of Padilla's address released Sunday evening said the GDB was "expected to skip at least the principal portion of its payment to hedge funds, credit unions, and other bondholders."

Like many financially distressed governments around the globe — think Greece, for example — Puerto Rico has been faced with demands from creditors and their consultants that the island undertake drastic spending cuts to create surpluses large enough to meet debt obligations.

The Padilla government has resisted these proposals.

And so Padilla's announcement, while not entirely unexpected, does reinforce the position from which the island will continue negotiations with its creditors over this specific debt. ZeroHedge reported Sunday that the price of the bonds on which Padilla said Puerto Rico would default had plummeted to 20 cents on the dollar.

In the financial world, Puerto Rico's distress does not come as a great shock, and many hedge funds have made considerable bets that the island will eventually reach agreements to pay back its creditors.

And in January 2015, Business Insider's Linette Lopez went so far as to argue that Puerto Rico in effect belonged to Wall Street. John Oliver did the same, more or less, last week.

Sunday's announcement is also certainly not the end of Puerto Rico's fiscal dilemma. Here's more from Reuters' overview of the situation facing Puerto Rico in the coming months:

GDB has held talks with groups holding some of its $4 billion in bonds to try to restructure the debt consensually.

Some creditors who are frustrated with Garcia Padilla's administration — which has not issued audited financial statements since fiscal year 2013 — say government reforms could allow the island to pay its debts without hurting its people. Garcia Padilla insists the U.S. territory needs relief from debt payments.

A default would ratchet up pressure on the U.S. Congress to find a legislative solution for Puerto Rico, which enters a key stretch in its fiscal saga, owing another $1.9 billion of debt on July 1, including about $777 million in general obligation debt backed by its constitution.

U.S. House Speaker Paul Ryan initially called for a plan by March 31. However, draft legislation from the House Natural Resources Committee, which would put Puerto Rico's finances under federal oversight and allow it to restructure debt through a bankruptcy-like process, has faced opposition from liberal and conservative wings of both parties.

[Celista]

U.S. House Speaker Paul Ryan initially called for a plan by March 31. However, draft legislation from the House Natural Resources Committee, which would put Puerto Rico's finances under federal oversight and allow it to restructure debt through a bankruptcy-like process, has faced opposition from liberal and conservative wings of both parties.

This sounds like a good idea. What is the basis for the opposition?

[Paarthurnax]

This sounds like a good idea. What is the basis for the opposition?

I assume its the fact that no changes will be made to prevent the decisions that created the disaster in the first place.

[Gorgodeus]

This sounds like a good idea. What is the basis for the opposition?

Wall Street. Hedge Fund groups not gonna let it happen.

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I assume its the fact that no changes will be made to prevent the decisions that created the disaster in the first place.

The US gov't caused the problem.

[Dsonsion]

What did they expect would happen when they made Latin Pop their only export good?

[Reeve]

The US gov't caused the problem.

Well yes and no. They created a federal tax break for companies going to Puerto Rico that caused a massive increase in industry, especially pharmaceuticals, which then created much more revenue for the Puerto Rican government. The Puerto Ricans took the cash windfall and started spending like mad. Then the federal government yanked the tax breaks and the companies left Puerto Rico, leaving massive budget shortfalls, so Puerto Rico started issuing debt to cover the shortfalls, until we ended up in the situation where we are now.

So yes, if the Federal Government hadn't had the tax break program in the first place, this likely never would have happened. But the government of Puerto Rico is ultimately the group that decided to spend so much.

[Pangean]

Wall Street. Hedge Fund groups not gonna let it happen.

- - - Updated - - -



The US gov't caused the problem.

John Oliver did a great story on this.
https://www.youtube.com/watch?v=Tt-mpuR_QHQ

[Dragoncurry]

The US gov't caused the problem.

Why would it be the US Government's fault that the Puerto Rican administration did not take the risk of pulling the tax break legislation into account, especially when the majority of your bottom line depends on the companies that are there due to said legislation?

Just curious.

[Gorgodeus]

Well yes and no. They created a federal tax break for companies going to Puerto Rico that caused a massive increase in industry, especially pharmaceuticals, which then created much more revenue for the Puerto Rican government. The Puerto Ricans took the cash windfall and started spending like mad. Then the federal government yanked the tax breaks and the companies left Puerto Rico, leaving massive budget shortfalls, so Puerto Rico started issuing debt to cover the shortfalls, until we ended up in the situation where we are now.

So yes, if the Federal Government hadn't had the tax break program in the first place, this likely never would have happened. But the government of Puerto Rico is ultimately the group that decided to spend so much.

It is little more involved than that. Not only did they strip away the tax breaks which led to economic decline, but there are many other factors:

Puerto Rico also suffers from the effects of the Jones Act, an early 20th-century law that bars foreign-flagged ships from traveling from one U.S. port to another. Foreign-flagged ships must instead transfer their cargo to U.S.-flagged ships after arriving at the first U.S. port. With Puerto Rico often the second port of call, the law helps make consumer goods more expensive there than on the mainland.

Medicare and Medicaid’s reimbursements to health care providers in Puerto Rico are a fraction of their mainland levels.

The island’s three main public utilities owe bondholders some $20 billion — a significant slice of the total $70 billion debt. If Puerto Rico had the same bankruptcy powers that the 50 states enjoy, it could authorize those companies to go to court to reduce their debts. But federal law does not permit the island to extend bankruptcy protections to its municipalities and public corporations.

A portion of Puerto Rico’s debt is held by hedge funds known as “vultures,” because of their ruthless pursuit of profit from impoverished debtor governments. The vulture funds appear to be using front groups to influence congressional debate on measures that could relieve Puerto Rican debt at the creditors’ expense.

During the entire time the crisis has been escalating, Congress has dragged its feet.

Then to make matters worse, Puerto Ricans are leaving en masse and relocating to the mainland to get away from the problems. The largest exodus in 50 years has resulted in a 9-percent drop in the island’s population, further eroding its tax base.

[Pangean]

He did not, he breaks literally nothing with this.

Yup. He broke nothing. Just explained the situation.

[Gorgodeus]

Why would it be the US Government's fault that the Puerto Rican administration did not take the risk of pulling the tax break legislation into account, especially when the majority of your bottom line depends on the companies that are there due to said legislation?

Just curious.

Explained above.

[Dragoncurry]

It is little more involved than that. Not only did they strip away the tax breaks which led to economic decline, but there are many other factors:

Puerto Rico also suffers from the effects of the Jones Act, an early 20th-century law that bars foreign-flagged ships from traveling from one U.S. port to another. Foreign-flagged ships must instead transfer their cargo to U.S.-flagged ships after arriving at the first U.S. port. With Puerto Rico often the second port of call, the law helps make consumer goods more expensive there than on the mainland.

Medicare and Medicaid’s reimbursements to health care providers in Puerto Rico are a fraction of their mainland levels.

The island’s three main public utilities owe bondholders some $20 billion — a significant slice of the total $70 billion debt. If Puerto Rico had the same bankruptcy powers that the 50 states enjoy, it could authorize those companies to go to court to reduce their debts. But federal law does not permit the island to extend bankruptcy protections to its municipalities and public corporations.

A portion of Puerto Rico’s debt is held by hedge funds known as “vultures,” because of their ruthless pursuit of profit from impoverished debtor governments. The vulture funds appear to be using front groups to influence congressional debate on measures that could relieve Puerto Rican debt at the creditors’ expense.

During the entire time the crisis has been escalating, Congress has dragged its feet.

Then to make matters worse, Puerto Ricans are leaving en masse and relocating to the mainland to get away from the problems. The largest exodus in 50 years has resulted in a 9-percent drop in the island’s population, further eroding its tax base.

Thank you for explaining it in more detail. Just curiously, what does Medicare and Medicaid's reimbursements to health care providers have to do with Puerto Rico's debt?

Also, did they spend more than they should have spent in order for them to have gotten into this hole? Why would you deal with "vulture" hedge funds anyway?

[Faloestin]

This sounds like a good idea. What is the basis for the opposition?

The vulture funds that hold 1/3 of the Puerto Rican debt in question have zero interest in taking any haircut on this, so they've been funding a bunch of lobbying & PR work that's trying to spin the House bill into a bailout. It isn't a bailout (no federal funds will flow to Puerto Rico) but could forestall a much larger and harder landing that could necessitate a bailout. The conservative right is carrying the water for the vulture funds, although they're having some tonal difficulties as they yo-yo between cries of "but Capitalism!" and insinuations that the Puerto Ricans can't be trusted to manage their own financial affairs.

Part of the compromise that Ryan is trying to push through allow some kind of bankruptcy-like protection (under which the vulture funds lose some cash) but would insist on some kind of federal oversight of Puerto Rico's finance & budget - similar to the setup that was imposed on DC several years ago. The liberal left thinks the idea is at best paternalistic and at worst racist, and would rather the whole thing go through without the oversight body. Keep in mind that the numbers in the House mean that Ryan will likely have to pick up some Democratic support, which the liberals think gives them a bit of leverage. They're right that Ryan will need Democratic support unless the conservatives start agreeing with stuff everybody else thinks is common sense, which isn't too likely, but (and this part is pure opinion) it's tough to see how that works out for them as the conservatives could give a crap about Puerto Rico or anybody from there, and are split between the half that thinks baby Jeebus is going to save everybody and the half that wants the larger economy to blow up so we can go back to the gold standard.

[Reeve]

It is little more involved than that. Not only did they strip away the tax breaks which led to economic decline, but there are many other factors:

Puerto Rico also suffers from the effects of the Jones Act, an early 20th-century law that bars foreign-flagged ships from traveling from one U.S. port to another. Foreign-flagged ships must instead transfer their cargo to U.S.-flagged ships after arriving at the first U.S. port. With Puerto Rico often the second port of call, the law helps make consumer goods more expensive there than on the mainland.

Medicare and Medicaid’s reimbursements to health care providers in Puerto Rico are a fraction of their mainland levels.

The island’s three main public utilities owe bondholders some $20 billion — a significant slice of the total $70 billion debt. If Puerto Rico had the same bankruptcy powers that the 50 states enjoy, it could authorize those companies to go to court to reduce their debts. But federal law does not permit the island to extend bankruptcy protections to its municipalities and public corporations.

A portion of Puerto Rico’s debt is held by hedge funds known as “vultures,” because of their ruthless pursuit of profit from impoverished debtor governments. The vulture funds appear to be using front groups to influence congressional debate on measures that could relieve Puerto Rican debt at the creditors’ expense.

During the entire time the crisis has been escalating, Congress has dragged its feet.

Then to make matters worse, Puerto Ricans are leaving en masse and relocating to the mainland to get away from the problems. The largest exodus in 50 years has resulted in a 9-percent drop in the island’s population, further eroding its tax base.

Seems like I remember Puerto Rico voting for statehood and a lot of congressional leadership in the US being supportive of it. Why aren't they a state now?

[Gorgodeus]

Thank you for explaining it in more detail. Just curiously, what does Medicare and Medicaid's reimbursements to health care providers have to do with Puerto Rico's debt?

Also, did they spend more than they should have spent in order for them to have gotten into this hole? Why would you deal with "vulture" hedge funds anyway?

Everything that affects the economy affects the debt. Puerto Rico has tried many things to help get out from under their debt, and come up with ways to repay it. The US gov't is not helping, and in most cases is hurting that effort.

In recent years, Puerto Rico’s government has made increasingly drastic spending cuts and tax hikes in order to meet its obligations to creditors. The government laid off tens of thousands of public employees and raised the sales tax from 7 percent to 11.5 percent. It has closed some 10 percent of Puerto Rico’s schools since 2014, driving a sharp rise in the size of classes. Even more schools are due for closure in the near future.

The strains on public health infrastructure have made it more difficult for the island to combat an outbreak of the Zika virus.

The relentless austerity has also stunted the island’s economy, while cutting back the very social services that are more needed than ever. Puerto Rico had an unemployment rate of 11.8 percent in March — more than twice the overall U.S. rate of 5 percent.

The poverty rate on the island is now 45 percent, according to the U.S. Census Bureau.

Then you have their citizens getting screwed over by Medicaid/Medicare. As stated before Puerto Rico has lost 9% of its population due to the economic hardships going on there. This means an even lower tax base than before, which only adds to the mess.

[nikolbolas]

Their own governor said he's at fault (or better rephrase that, their previous governor).

[Dragoncurry]

Everything that affects the economy affects the debt. Puerto Rico has tried many things to help get out from under their debt, and come up with ways to repay it. The US gov't is not helping, and in most cases is hurting that effort.

In recent years, Puerto Rico’s government has made increasingly drastic spending cuts and tax hikes in order to meet its obligations to creditors. The government laid off tens of thousands of public employees and raised the sales tax from 7 percent to 11.5 percent. It has closed some 10 percent of Puerto Rico’s schools since 2014, driving a sharp rise in the size of classes. Even more schools are due for closure in the near future.

The strains on public health infrastructure have made it more difficult for the island to combat an outbreak of the Zika virus.

The relentless austerity has also stunted the island’s economy, while cutting back the very social services that are more needed than ever. Puerto Rico had an unemployment rate of 11.8 percent in March — more than twice the overall U.S. rate of 5 percent.

The poverty rate on the island is now 45 percent, according to the U.S. Census Bureau.

Then you have their citizens getting screwed over by Medicaid/Medicare. As stated before Puerto Rico has lost 9% of its population due to the economic hardships going on there. This means an even lower tax base than before, which only adds to the mess.

Understood. Thanks for the explanation.

[Gorgodeus]

Seems like I remember Puerto Rico voting for statehood and a lot of congressional leadership in the US being supportive of it. Why aren't they a state now?

It never made it out of Congressional committee.

[Reeve]

It never made it out of Congressional committee.

Do we know why? Seems like a US territory fulfilling the criteria and voting for statehood ought to have some explanation if their request never makes it out of committee purgatory.

[Faloestin]

Do we know why? Seems like a US territory fulfilling the criteria and voting for statehood ought to have some explanation if their request never makes it out of committee purgatory.

This is a biased reply, so take it for what it's worth. Two factors - a) while some Puerto Rican voters have voted for statehood when given a chance, the most recent vote wasn't clear and it's not a universally held view in Puerto Rico, which b) gives folks on the right plenty of cover for obstructing the admission of a mostly non-white state full of likely Democratic voters.