Puerto Rico governor calls for bankruptcy; adviser says island ‘insolvent’

30 Jun 2015 | Author: | No comments yet »

Debt casts pall over Greece, Puerto Rico.

SAN JUAN, Puerto Rico — Puerto Rico’s governor said Monday night he will form a financial team to negotiate with bondholders on delaying debt payments and then restructuring $72 billion in public debt that he says the U.S. island can’t repay. That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises. Alejandro Garcia Padilla made the announcement hours after international economists released a gloomy report on Puerto Rico’s economy in another jolt to the recession-gripped island as well as a world financial system trying to avoid a collapse in Greece’s finances. “Even if we increase revenues and cut costs, the magnitude of the problem is such that we would not resolve anything given the weight of the debt we’re dragging,” he said. “The only way we’ll get out of this hole is to join forces and agree, including bondholders, to assume some of the sacrifices.” Legislators are debating a $9.8 billion government budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay down the debt.

The island’s $72 billion debt is larger per capita than any state, but the island’s government can’t file bankruptcy like Detroit did because only cities are allowed to file Chapter 9. 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. … 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. Puerto Rico’s bonds were popular with U.S. mutual funds because they are triple-tax exempt, but hedge funds and distressed-debt buyers began stepping in to buy up debt as the island’s economy worsened and its credit rating dropped. The White House threw cold water Monday on the notion of bailing out Puerto Rico from its financial crisis, instead urging Congress to consider changing the law to permit the island’s government and public agencies to declare bankruptcy.

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. In fact, lower interest rates can persuade some borrowers to take on more debt. “Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts,” the Bank for International Settlements, an organization whose members are the world’s central banks, wrote in a recent analysis of the global economy. A further rise in the government bond yields of Spain and Italy could cause a contraction in the fiscal policy of those countries, noted Alberto Gallo, head of macro credit research at the Royal Bank of Scotland. 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.

Unlike Japan and the United States, countries in the common currency cannot unilaterally loosen monetary policy and let their currencies fall to try and generate the growth that would then make it easier to pay off debts. “Greece needs far easier money than the rest of Europe and it can’t get it because it is locked in with the rest of Europe,” said Joseph E. Ukraine is moving closer to default after creditors continued lending to the country despite zero growth and a corrupt and opaque political and economic system.

Now, some of those creditors, including Franklin Templeton, an American investment firm, have resisted Ukraine’s demand they take a loss on their principal investment, preferring instead to extend the repayment period.

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