Another fine debt crisis

30 Jun 2015 | Author: | No comments yet »

Debt casts pall over Greece, Puerto Rico.

WASHINGTON — U.S. lawmakers have no firm plan to help more than 3 million American citizens living 1,000 miles off the coast of Florida under a government staring down the barrel of a $73 billion debt crisis. According to a 2014 report by the London School of Economics, “Greece’s economy in the last 40 years was based on excessive consumption, and external and internal public borrowing. … Alejandro Garcia Padilla put it bluntly on Sunday, admitting that the island’s “debt is not payable.” Garcia Padilla told The New York Times in an interview that if the government cannot get the economy to grow, Puerto Rico “will be in a death spiral.” Garcia Padilla’s comments come days before Puerto Rico’s government-run electric utility, known as PREPA, must make a $400 million debt payment.

The peculiarity of the Greek public sector is the large size and exorbitant public expenditure on wages, but also the low efficiency along with extremely low quality of services for citizens.” Puerto Rico Gov. If the impact on Puerto Rico’s citizenry isn’t enough to spur action by the U.S. government, or by the Wall Street hedge funds that hold a significant stake in the island’s debt, maybe the potential effect of a default on mainland Americans will do the trick. A default by Puerto Rico would roil the municipal bond market — typically a low-risk arena — leaving retirement funds, pensions and institutional investors “massively exposed,” explained Dante Disparte, founder of the capital management firm Risk Cooperative. “A $73 billion write-off has a potential to bring down many more aspects of the economy than we might let on, because we are trying to treat it like it’s isolated and that it’s an island, but it’s a dollar-denominated economy. It’s part of the U.S., and the firms to whom that debt is owed may very well be the firms managing our grandparents’ pensions and our own retirement plans,” Disparte said. Moreover, according to El Nuevo Dia, the most popular newspaper on the island, the actual debt is a “frightening” $167 billion, or 162 percent of GDP.

An editorial in the paper concluded, “You don’t need to be an economist from Harvard to understand that this debt is unsustainable.” By comparison, California’s debt, as estimated in Gov. Every time he visits, Disparte said he sees the effects — an increasing number of vacant properties. “When you are playing with things this large and this systemic, you need kid gloves and delicacy and order — not, ‘It doesn’t matter to me. Earnest acknowledged Puerto Rico’s inability to restructure its public debt under bankruptcy, as municipalities in the mainland are allowed to do. “So there are strong merits to having an orderly mechanism for Puerto Rico to manage the financial challenges of its public corporation if needed and so we’ve urged Congress to take a close look at this particular issue,” Earnest said, hinting at possible White House support for expanding Chapter 9 bankruptcy to Puerto Rico. “Essentially this means that a Chapter 9 scenario that would be available to all the 50 states is not one that is currently to Puerto Rico, and that is something only Congress can change.” Garcia Padilla remained steadfast in a recorded address broadcast Monday evening, outlining a plan that would allow the island to avoid “choosing to pay police officers and school teachers” or “our debt.” While preaching shared sacrifice, Garcia Padilla made an impassioned pitch for Washington lawmakers to “take concrete action in this crisis. Not only is it directly plugged into the gigantic U.S. economy, with complete free trade, but residents pay no federal income tax, and the commonwealth tax is just 4 percent of income. The measure ultimately was struck down in court and is currently on appeal. “There are lawsuits here that would happen almost immediately between bondholders and PREPA, between one group of bondholders and other bondholders, and between bondholders and their brokers-slash-dealers, or whoever bought the bonds for them,” Farber said. “So there’s a potential for lawsuits going all kinds of ways.

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