Thursday, October 19, 2017

Yes, Puerto Rico's Debt Needs To Be Forgiven

Image result for images of Puerto Rico damage
Scene of desolation in Puerto Rico after Hurricane Maria.

In the wake of Hurricane Maria's devastation of Puerto Rico the issue of bringing the island territory of the U.S. back to economic viability has come to the fore.  Let's recall one of the issues even before the monster storm (barely 2 mph less than category 5) was Puerto Rico's  debt.  But in the wake of  Maria, which could cost the island up to $95 billion, more than double its current debt, there are few good options available. The most likely of which is that, under the existing law, all debt holders, including PREPA (electric utility) bondholders, will be those left largely footing the bill.

Even econ maven Steve Rattner, who initially inveighed against debt forgiveness,  stated flatly in a CNN interview a week ago that investors will have no choice but to "take a haircut".  There is simply no way it can ever be in a position to repay the debt especially after the hurricane's ravages. Rattner of Willett Advisors, originally told Bloomberg TV  that Congressional action might be needed to wipe out the debt.

But this isn't true. (A realization that may have subsequently caused Rattner to change his tune)

Under the PROMESSA act, according to UN sovereign debt consultant Eric LeCompte, the potential for Puerto Rico's debt to be significantly forgiven is a real possibility that will not take an act of Congress. Under the law, the bankruptcy judicial authority has significant latitude to consider the U.S. territory’s ability to pay the debt. The territory also has $50 billion in unfunded pension liabilities.

LeCompte pointed out that the super bankruptcy process includes a key provision that pins debt payments to the economic ability of a sovereign region to pay. The provisions of the PROMESA act are more sweeping in this regard than credit leniency afforded to states or other sovereign governments, he said.  Adding - in one online interview with an investor site (ValueWalk):  "When PROMESA legislation was written, it was very specific to Puerto Rico.  It would be very difficult for other territories to have the same latitude under the law.”

LeCompte also noted that money earmarked to pay bondholders is currently being diverted to hurricane relief.  This in itself makes it incomprehensible why Congress would recently pass - as part of general emergency relief-  a $4.9 b  package for the island territory but via a LOAN with interest attached. WTF?!  With bondholder debt diverted to hurricane relief why on Earth would you add more debt as a component of relief?  It's idiotic, but also passing sadistic.

Basically, what the Repukes in Congress have done is to essentially charge Puerto Rico "a leasing fee for the life raft as they drown", in the words of one commentator. How about, instead of treating the people of Puerto Rico like second class citizens, we treat them like the  hurricane victims of Houston? Give them hurricane relief with NO strings, i.e. no interest-bearing loans attached. This so they can get a head start on rebuilding and get on with their lives.

But the zeitgeist appears to be one of calculated cruelty combined with economic stupidity, such as exemplified in a recent WSJ piece ('Forgiving Debt Would Hurt Puerto Rico') by John Tamny. According to Tamny,  Puerto Rico's debt troubles "were the direct result of policies that hurt growth so forgiving its debt would only free Puerto Rico's politicians from having to address the policies that were suffocating its policies to begin with".

What is Tamny's solution? It is "to allow the government to feel the pain of its debt"  then this would "leave politicians no choice but to adopt pro growth policies".  And what pray tell does this mean? Well "a reduction in income taxes for the highest earners".  So, in the analogy of a foot race, Tamny would have the island cut its legs another foot shorter. 

He clearly is still hostage to the supply side nonsense, which almost brought Barbados to ruin in 1991 thanks to its adoption of Reagan's bunkum in 1986.

The fact is that any drop in revenue from whatever source will not help Puerto Rico, given any island state is already behind the financial 'eight ball' by virtue of its geographical situation - being an ISLAND.  Islands (such as Barbados and Puerto Rico) have to have all resources come in from outside - ship or plane - which naturally increases the cost of living. No surprise then that Puerto Rico's cost of living is some 13 percent higher than any location in the U.S.  Barbados cost of living is even higher than Puerto Rico's - as we relearn each time we visit and go the grocery mart.

Puerto Ricans also can’t claim the Earned Income Tax Credit or Child Tax Credit, which serves to both cushion the blow of living in poverty while enticing people into paid work. Those would be useful in a place where the labor force has fallen by about 20 percent over the last decade.

The territory’s economic struggles -  like those of Barbados -  led it to borrow heavily by issuing bonds in an attempt to keep its budget balanced. But it hasn’t been able to climb out of the hole, and in 2015 its governor announced that it couldn’t keep paying its creditors. Because Puerto Rico isn’t a state, it has been denied the ability to go through municipal bankruptcy. Congress instead set up a Financial Oversight Management Board to come up with a plan. So far, the plan calls for austerity measures that include $25.7 billion in spending cuts. The plan even acknowledges that his will lead to another “lost decade” of economic growth for the island (which could easily end up being worse than their projections).

However, economists Joseph Stiglitz and Martin Guzman have pointed out that if the territory’s economy can’t recover, it will continue to have trouble paying anything to creditors, not to mention prolonging the suffering of its residents. Conversely, if the economy is allowed to regain its health, it will have more revenues that it can use to pay people back.

Another option would be to push for the hedge funds and other firms that own Puerto Rico’s debt to write off large portions of it. Under Congress’s plan, the island can unilaterally reduce its debt with the approval of a federal judge. Doing so could have other ramifications—such as increasing borrowing costs—but it’s also worth remembering that investments are inherently risky. Rattner following his change of heart pointed this out. So the same way a stock investor needs to expect the inevitable losses, so also bond investors need to expect the inevitable "hair cuts" if they happen to invest in places, or products, utilities that go under - for whatever reason.

Let's also bear in mind that allowing Puerto Ricans to  continue to suffer will do no one any good and  - if anything - drive hundreds of thousands to abandon the island to come to the mainland U.S. And, as U.S. citizens, there isn't a god damned thing Trump or his Reich wing cronies can do to stop such a mass migration. Don't like it? Then forgive the damned debt, and offer no strings attached money for relief - to rebuild!

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