Fausta's Blog

American and Latin American Politics, Society, and Culture

By

Puerto Rico: Governor wants to do business with Cuba

Puerto Rico is $72+billion in debt, and defaulted last month on a $422 million debt payment for the third time. Governor Alejandro García Padilla calls it “a humanitarian crisis,” continues to spend like crazy, wants Washington to bail him out, and won’t act to reduce the size of government, the cost of energy, or the cost of doing business in the island.

Instead, he goes to Cuba to praise Raúl Castro and intends to open a commercial trade office in Havana. Of murderous Raúl, AGaPito said,

“He’s very affable, very courteous, a pleasure to meet.  He not only took the time to converse with me, but even showed deference by taking me aside so he could speak to me alone.”

Nice going, Skippy!

Historically, Cuba has defaulted on all its debts. I hope Carlos Eire doesn’t mind, but I must steal his photo:

Expect this much from our Havana trade office…but, remember, zero is a magical number.

Not all imbeciles are communists. Going by the evidence, I’d say AGaPito is a communist imbecile.

Share

By

Puerto Rico: Don’t expect payment anytime soon

Mary O’Grady describes,
Puerto Rico Plays Chicken With Its Creditors

Failure to negotiate in good faith could cost the island the help it seeks from Washington.

On Sept. 1 the state-owned Puerto Rico Electric Power Authority (Prepa) faces a deadline for restructuring more than $8 billion in debt. If it can’t come to an agreement with creditors, a previous forbearance agreement will expire and the company will face default.

On Sept. 1 the state-owned Puerto Rico Electric Power Authority (Prepa) faces a deadline for restructuring more than $8 billion in debt. If it can’t come to an agreement with creditors, a previous forbearance agreement will expire and the company will face default.

In that event, bondholders could be expected to go to court to begin the process of receivership, as the bond contracts stipulate.

This high-stakes negotiation comes when Puerto Rico is asking Congress to give its municipalities and public agencies access to the chapter 9 bankruptcy protection the 50 states have. A Prepa default would be disruptive and possibly increase the odds that Congress will agree.

But failure on the part of the utility to negotiate in good faith also could backfire and jeopardize support in Washington for giving Puerto Rico chapter 9 protection. It could also reduce sympathy on the mainland for the write-down of other Puerto Rico debt issues—which total some $63 billion—that Gov. Alejandro García Padilla says he needs to get the island growing again.

Read the whole article.

The thing is, the governor has little to lose by defaulting.

  • I have stated in the past  that you can be assured the Puerto Rican government will continue to spend like crazy because 20% of the workforce is in government jobs, which gives the ruling party a built-in constituency. As I have pointed out before, it’s in the governor’s best interest to keep them happy, even if it means to default on all debt in order to meet payroll.
  • If the U.S. refills the ATM, García Padilla will claim credit for it; if the U.S. doesn’t, he has someone to blame.
  • People who don’t agree with the economic policy are exercising their right to move to places where the U.S. economy is brighter, thereby removing a large number of what would be opposition votes.
  • High debt-high spending make the island less appealing for statehood status.

Bottom line: No improvement in the horizon.

Share

By

Running out of people’s money: Puerto Rico UPDATED

Puerto Rico just defaulted for the first time

The commonwealth paid a mere $628,000 toward a $58 million debt bill due Monday to creditors of its Public Finance Corporation. This will hurt the island’s residents, not Wall Street. The debt is mostly owned by ordinary Puerto Ricans through credit unions.

And (emphasis added)

On Monday, Puerto Rico had to make a monthly debt payment of $483 million. Puerto Rico paid all its debt due except the $58 million due to creditors of its Public Finance Corporation. The government is strategically choosing not to pay the PFC debt because the entities that own the debt, credit unions and ordinary Puerto Ricans, have little legal power to fight back in court.

The Economist:

The PFC’s 99% missed instalment [sic] is unlikely to set off an immediate cascade of lawsuits or further defaults. Its paper is technically nothing more than a “moral obligation”, backed only by a flimsy letter of credit from the Government Development Bank (GDB), and is mostly held by pliant local investors like credit unions. Just three days before the PFC stiffed its lenders, the GDB duly made a $170m payment on its own debt. Nonetheless, the PFC’s default sharply accelerates Puerto Rico’s debt crisis: it extinguishes any hope that the island’s creditors might all emerge unscathed, and cuts off whatever access to short-term financing the government might have had left.

It may well have been Mr García Padilla’s intention to provoke a sense of urgency.. . .After the island passed its own version of Chapter Nine last year, federal courts struck it down, on the grounds that municipal bankruptcy falls exclusively under federal jurisdiction. That left the governor with no choice but to beseech America’s Congress to bring his territory under Chapter Nine, a plea that has so far fallen on deaf ears. By letting the weakest link in its payment chain snap, Puerto Rico has made the spectre of a chaotic, piecemeal default—which once seemed remote—immediate. In theory, that could spur Congress into taking swift action.

Even if the ploy of taking-oneself-hostage were to succeed, however, the extension of Chapter Nine to America’s overseas territories would not be a cure-all. That law would not cover the restructuring of Puerto Rico’s $13 billion of “general-obligation” (GO) debt, which is protected by a constitutional pledge that it must be paid before all other obligations,

What it comes down to is, Puerto Rico has triggered the biggest municipal default in US history (emphasis added)

It implies a sweeping default on much of its $72 billion debt burden, equal to 100% of Puerto Rico’s gross national product (GNP) and more than five times the debt ratio of California or Texas.

That’s what massive overspending looks like.

UPDATE
Former Puerto Rico Governor Luis Fortuño discusses how Puerto Rico can avoid defaulting on debt.

UPDATE 2
Instapundit calls it “RUNNING OUT OF OTHER PEOPLE’S MONEY.” Yes, but they government defaulted by screwing the people who elected them first, as I linked to above,

“The government is strategically choosing not to pay the PFC debt because the entities that own the debt, credit unions and ordinary Puerto Ricans, have little legal power to fight back in court.”

They ran out of their own people’s money, but you can be assured they will continue to spend like crazy because 20% of the workforce is on government jobs, which gives the ruling party a built-in constituency. As I have pointed out before, it’s in the governor’s best interest to keep those happy, even if it means to default on all debt in order to meet payroll.

Share

By

Puerto Rico: A few thoughts on the economic crisis

As you already know, Puerto Rico has run up enough debt to become the Greecespot of the Caribbean, which could have been averted, as former governor Luis Fortuño explained yesterday,

Fortuño was governor from 2008 to 2012, and lost since he insisted on doing what needed to be done. Listen to this 2011 interview with John Stossel,

The debt is only part of the problem,

and includes the staggering failure to adequately account for revenues and expenditures

which points to serious structural problems the current governor, Alejandro García Padilla, is not addressing, asking instead bondholders to “share the sacrifices.”

Here’s the situation as I see it:

It is not in García Padilla’s interest to improve the economy

García Padilla’s administration relies heavily on a large bureaucracy, and he knows his predecessor was voted out of office for trying to reduce it. Estimates show that the government of Puerto Rico has 160,000 employees too many. That’s enough of a voter base to keep him in office.

If the U.S. refills the ATM, García Padilla will claim credit for it; if the U.S. doesn’t, he has someone to blame.

And don’t forget that García Padilla and other commonwealth supporters lost miserably during the last plebiscite, when statehood won by approx. 60%. For as long as Puerto Rico remains in a financial swamp, García Padilla knows the question of statehood will be dismissed with “And They Want to Be a State?”
(Or as Ed Koch put it, “The People have spoken … and they must be punished.”)

Again, it is not in García Padilla’s interest to improve the economy.

Share

By

Puerto Rico: The great debt scam

Moody’s downgraded Puerto Rico’s general obligation (GO) rating to Caa1 last January, on par with Argentina, a notch (a very small notch) above Venezuela, but worse than Bangladesh.

Now the government of Puerto Rico doesn’t want to pay up.

We all know what Louis would say,

Mary O’Grady writes on Puerto Rico:

Puerto Rico’s Debt-Relief GambitThe island’s political class wants to stiff its creditors. Congress shouldn’t go along.

A group of institutional bondholders—including Franklin Advisors and Oppenheimer Funds—representing 40% of the outstanding bonds and more than 500,000 individual bondholders have offered the company a restructuring plan to avoid receivership. It includes a new, $2 billion capital commitment to modernize power-generation equipment and cut costs. If Prepa [Puerto Rico Electric Power Authority (Prepa)] can improve its operational efficiency, the group believes that its proposal can lower the electricity rate to the range of 22 cents per kilowatt-hour from the 28-cent range of recent years.

This intervention is unlikely to appeal to Puerto Rico’s political class, which uses Prepa as a populist honey pot. The company has a dismal collection record and one of the most notorious deadbeats is the government. A Nov. 15, 2014, report by FTI Capital Advisors found that the company had “over $200 million in accounts receivable from public corporations, of which approximately 70% is over 120 days old.”

Making them pay is the right thing to do; it’s just not the Puerto Rican thing to do.

Share

By

Puerto Rico: Default

Mary O’Grady writes, Puerto Rico’s Borrowing Bubble Pops
Moody’s measure of ‘expected default’ for Puerto Rico is higher than Argentina and Venezuela.

A Puerto Rican default should not surprise anyone. According to Carlos Colón de Armas, acting dean of the School of Business Administration at the University of Puerto Rico, for eight years from 2005 through 2012, government expenses exceeded revenues on average by approximately $1 billion annually. The dean told me by telephone that total commonwealth debt is now around $73 billion and in 2013 it was 101% of the island’s gross national product (GNP) up from 57% in June 2001. (Although gross domestic product is the most widely accepted measure of an economy’s size, it reflects the profits of large multinational corporations booked for tax purposes in Puerto Rico but not retained in the local economy. Therefore, GNP, a measure of what is produced by locals, is a more accurate tool to assess the economy.)

Unlike Luis Fortuño, the previous governor, current governor Alejandro García Padilla

increased expenses by almost $600 million in his first budget. While he is now cutting spending, the cuts are mostly from that increase, according to Mr. Colón de Armas. Some $500 million-$800 million in fat—from subsidies to special interests to funding for political parties—remains untouched in the $9.6 billion budget.

Fortuño lost by 12,000 votes since García Padilla (known as Agapito) promised the moon and the stars.

And there it goes: a certain default.

Added,

Share

By

Puerto Rico: Growth yes, more taxes no

Says Monica Showalter of IBD, and I wholeheartedly agree:
To Avoid Becoming The Next Detroit, Puerto Rico Needs Growth, Not Taxes

Too much bureaucracy, much of it for welfare, and too much rewarding failure over success drive up costs and drive out the productive. Puerto Rico’s most talented citizens are voting with their feet. The island loses about 1% of its population a year, a deadly loss compounded over the years for any economy.
To bring these people back, the governor has to fight to cut taxes and really go after the country’s entrenched special interests with a baseball bat.

The 39% corporate tax has to go.

He [governor Alejandro García Padilla] also must fight in the U.S. Congress to reinstate Puerto Rico’s special tax break that ended in 2006 so that investment will once again return.

Finally, he must also take on Big Labor’s favorite, the Jones Act, which artificially drives up shipping costs, putting local manufacturers at a disadvantage, demanding Congress at least give Puerto Rico an exception.

Read the whole thing.


Share

By

Puerto Rico: Junk bond status

Only about 1 percent of American municipalities have been given a junk rating by S&P:

Puerto Rico GO Bonds Inch Higher After S&P Downgrade
A Sign That Some Buyers Are Relieved To Have The Downgrade Behind Them

S&P on Tuesday lowered Puerto Rico’s general obligation bond rating to double-B-plus from triple-B-minus, stripping the island of its investment grade rating. The rating firm said it cut the rating because of Puerto Rico’s “reduced capacity” to borrow and the contraction in its economy in all but one year since 2006. It kept the island’s ratings on watch and warned of further cuts if the island is unable to raise money.

Puerto Rico has also been weighed down by large pension obligations, a 15% unemployment rate and big losses in the value of some of its debt. But the Puerto Rico government has been taking steps to bolster the economy and improve its fiscal outlook by overhauling pensions and raising taxes.

Despite the benign response to the downgrade, the cut adds pressure on Puerto Rico to shore up its finances with a near-term borrowing, analysts said. Puerto Rico, which has $70 billion of debt, has been able to put off borrowing in recent months, but its flexibility is fading, said Daniel Hanson, a credit analyst at Height Securities LLC.

Island officials have been planning a bond offering of some $2 billion in coming weeks, according to people familiar with the matter. The officials have been weighing how to raise money with offerings backed by sales taxes or the island’s general fund, or a deal structured by hedge funds and other distressed investors who may demand yields near 10%.

[T]he yields it will have to pay of up to 10% could likely scare off investors and further reduce confidence in Puerto Rico’s finances.

Moody’s and Fitch are expected to be next with their downgrades.

The White House Says There Are No Plans To Bail Out Puerto Rico

Gov. Alejandro García Padilla is finally trying to cut the budget and reduce the deficit to $75 million, something he’s been avoiding, considering how his predecessor, Luis Fortuño, was not re-elected for doing just that.

To add to García Padilla’s woes, a misspelling of his name caused a flurry of tweets under the hashtag #GobiernoPandilla (gangster government), including the news that the administration-appointed telecommunications board (Junta Reglamentadora de Telecomunicaciones) granted contracts to partisans, and that the University of Puerto Rico’s administrators’ payroll increased by 35%:

Monumental payroll increase UPR for #GobiernoPandilla’s #FriendsOfTheHeart

No word as to whether García Padilla, commonly referred to as Agapito (for Alejandro GArcía PadIlla + “to“), has considered laying off his five relatives working for the government.


Share