Tag Archives: Debt Crisis

The World Debt Crisis

The Fiscal Mess That is Puerto Rico


Updated December 30, 2015-4:00 pm

Gov. Garcia Padilla just informed the press that Puerto Rico would default  on a 37.3 million debt payment due January 4, 2016. Not surprising anyone, Gov. Padilla went on to say that Puerto Rico would not make any further payments to the fund devoted for future payments. In his USA Today post, Nathan Bomey reports on this development and specifically quotes part of an email of Matt Fabian of Municipal Analytics:

“The governor appears not to know, week to week, how much cash flow the commonwealth will have and which debts will and won’t be paid…Puerto Rico does not have any kind of plan for fixing the mess it has gotten itself into. That, after complaining to Congress about imminent defaults, the commonwealth could find the money to pay almost a billion dollars in debt service while also paying Christmas bonuses will not advance Puerto Rico’s demands for bankruptcy protection.”

On November 30 the Governor issued an executive to “clawback” funds pledged to the payment of specific bonds. These “clawback” funds will be used by Puerto Rico to pay part of the debt coming due on January 4, 2015. Not only was the executive order unconstitutional, it exacerbated the debt problem.


Christmas arrived early for President Barack Obama. The U.S. Congress passed the Omnibus Spending Bill of 2016. The 1.8 trillion dollars spending bill averts a shutdown and funds the government for the next year. Most observers credit newly elected House Speaker, Paul Ryan, with convincing restive Republican colleagues to go along with the legislation. The bill met smooth sailing in the Senate. In a surprising procedural move, Senators relaxed certain rules which permitted them to quickly consider and adopt the legislation. Both houses passed the legislation by wide bipartisan margins. President Obama, upon the signing the bill into law, praised Congress for coming together and passing an important piece of legislation.

Both Democrats and Republicans claimed a political victory in the passage of the spending bill. Republicans finally lifted the ban on oil experts that the oil industry desperately wanted. Democrats received funding for refugees and other programs dear to them. The bill has something for every legislators’ Christmas Stocking. Yet, some House and Senate democrats were upset that the legislation failed to offer financial help to Puerto Rico. The Caribbean island is unable to pay its sovereign debt and is in dire need of an injection of cash.  The Hispanic and Black Congressional Caucasus threatened to derail passage of the legislation if it did contain some relief for Puerto Rico.

New York State’s representatives cheered the bill’s extension of the Zadroga law for 9/11 responders. At the same time, they are unhappy that the legislation’s failed to address Puerto Rico’s debt problems. Many of the state’s politicians (D) are supported by large Puerto Rican constituencies. Almost all of New York City’s elected politicians lobbied Congress to come to Puerto Rico’s aid. Unfortunately, advocates for Puerto Rican debt relief failed to make out their case on an intellectual level.

None-the-less House Democratic Leader, Nancy Pelosi, on December 18, introduced H.R. 4290, the Puerto Rico Emergency Financial Stability Act. The bill, if signed into law, would stay legal actions filed by Puerto Rico’s creditors who have not been paid on their debt holdings. The proposed stay would remain in effect until March 31, 2016. Rep. Pelosi believed that by that time Congress would have passed comprehensive legislation dealing the Puerto Rico’s debt crisis.  By submitting the bill, Rep. Pelosi indirectly acknowledged that Puerto Rico was likely to default on making the Jan.1 2016 debt payment. Regardless of Puerto Rico’s imminent default, House members reacted with little enthusiasm towards the Pelosi bill. I believe that she knew this but had introduced the bill to further her own ambitions. Soon after introducing her bill, Rep. Pelosi was in Puerto Rico receiving political donations from local Democrats.

On November 6, 2012, Puerto Rico’s residents  elected Alejandro Garcia-Padilla as governor of the island. Consequently, he has served in that capacity as the Island’s public debt grew into a crisis. In the first days of August 2015, the Governor began publicly acknowledging that Puerto Rico could not and would not pay its outstanding sovereign debt of more than 70 billion dollars. Gov. Garcia-Padilla made it clear that Puerto Rico’s only course of action was to default. What he avoiding saying was that Puerto Rico’s economy was in dire straits for years. While its economy was shrinking, Puerto Rico continued to borrow billions for ill-advised projects and ventures. Most recently, government officials borrowed billions just to meet expenses.

In fairness to the Governor, there has always been a nationalistic segment of the local electorate that believed the government should use public debt financing to support a socialist agenda. Though the crisis in Puerto Rico is real and its ramifications could have serious consequences for the average resident of the island, I do not believe that Puerto Rico deserves to be bailed out with U.S. taxpayers’ money.

What has not been sufficiently reported by the press is Congress’ efforts to address the Island’s financial problems. Under pressure from the Obama Administration, Governor Gracia Padilla and Puerto Rico’s non-voting representative in the U.S. House of Representatives, Garcia Padilla, both legislative bodies proposed differing bills to deal with the crisis. For many legitimate reasons, the Democrats’ proposals for sweeping help failed to gain meaningful support from either party. The lawmakers wrestled with the benefits and drawbacks of two forms of assistance, a financial bailout package and granting the Island the right to declare bankruptcy.

The House considered a bill that would have allowed the Island to declare bankruptcy without imposing an oversight authority to put Puerto Rico’s finances in order. The Senate bill contained no provision for granting Puerto Rico bankruptcy protection. However, the bill did offer 3 billion in immediate bailout funds and required the establishment an oversight authority. Had both bills been passed by their respective bodies, a Senate-House Conference Committee would have met to resolve the bills’ differences. U.S. law makers seem to agree that Puerto Rico’s financial crisis had been brought about by risky financial policies, an unwillingness to enact correcting austerity measures and a failure to respond appropriately to the shrinking economy.

Greece Moves Closer to a Eurozone Exit

Once again Greece stands at the exit door of the Eurozone (EZ). In the past Greece’s possible exit had been discussed in hushed and guarded terms. The conversations behind the public displays of support for Greece indicated a growing impatience with the country’s failure get its finances in order. Quietly European leaders and financial institution have considered different scenarios that might result from a Greece exit from the EZ. United States banks and American financial companies have moved to limit their exposure  if Greece defaults. Hundreds of lawyers and financial advisers are reviewing legal documents and agreements in effort to protect their American clients’ interests. A Greek default would cause a wave of litigation which US companies hope would be heard under New York State or British law and the cases heard in friendly venues. More importantly; the banks do not want to be repaid in devalued currencies or worthless drachmas.

I have always argued that the EZ should not become involved in expensive and futile rescue attempts of the Greek economy.

Greek Prime Minister Antonis Samaras recently traveled to Germany and France for consultations with his counterparts over Greece’s implementation of the agreed upon austerity measures. The Greek leader’s coalition government was only formed upon the agreement that the country would renegotiate the terms of the bailout agreement(s).  Most Greeks are weary of the imposed austerity measures that were agreed to in exchange for having their economy rescued from default. The recent Greek presidential election was a protest vote against the austerity measures. Though the leaders of the more economically stable EZ countries have voiced support for Greece’s plight, there has never been much hope that the bloc would renegotiate  the bailout agreement. PM Samaras’ was tasked with requesting from his counterparts a two-year extension for Greece to carry out the required cost cutting. The measures are needed to qualify for the next 33.5bn-euro installment of its second 130bn-euro bailout. With the EZ teetering on the brink of another recession and other EZ members requesting bailouts, it might not have been the best time for Greece to ask for its money without having complied with the terms of the agreements.

The first high level meeting on PM Samaras’ schedule was with German Chancellor Merkel. The Greek leader had to appreciate the difficulty of his task in convincing the Germans to give his country more time to comply with the terms of the bailout agreement(s). Chancellor Merkel is credited with having successfully argued for the EZ’s austerity measures strategy of resolving the Europe’s debt crisis. After the meeting the two leaders held a joint new conference. PM Samaras stated the following in front of a gathering the international press:

“Greece will stick to its commitments and fulfil its obligations. In fact, this is already happening…We’re not asking for more money…(Greece) needed time to breathe”.

The German response did not surprise anyone; no decision would be made on Greece’s request nor would additionally funds be released until the Trioka’s September report has been received and reviewed. Chancellor Merkel reiterated her emotionally empty support for Greece’s continued membership in the EZ.  She expressed Germany’s position in clear and concise terms:

“For me, it’s important that we all stand by our commitments, and in particular await the [publication of] the troika report, to then see what the result is…But I will encourage Greece to follow the path of reform, which demands a lot of the Greek people.”

Some experts suggest that Ms. Merkel spoke in conciliatory terms  to prepare Germans for continued financial support for Greece. I disagree with this interpretation of her comments. Volker Kauder who is the leader of Chancellor Merkel’s political party stated that he had not problem with Greece exiting the EZ. The comments from leaders and financial experts, taken together, indicate that the Germans have grown resentful of mortgaging their future to rescue the economies of other member nations.

PM Samaras next arrived in France for face to face consultations with French President Hollande. The Greek leader again requested a two-year extension for Greece to implement the necessary cost cutting measures. I am sure that PM Samaras believed that President Hollande would be more understanding of Greece’s plight. President Hollande was recently elected to his office based on a platform of promoting growth versus cost cutting and austerity measures. The French leader expressed understanding for Greece’s difficulties but indicated that the country must carry out the austerity measures. President Hollande also said that any decision on Greece’s request would have to await until the September report of the Troika. It is a given that the Troika’s report will conclude that Greece has not made any real progress on implementing the requested measures. The Greeks must realize that they, likely, will not receive any more bailout funds.  

During his trip to Germany and France PM Samara’s failed to get any meaningful concessions for his tired and angry countrymen. It is inconceivable to me that he would have expected to receive more time to put Greece’s finances in order and, at the same  time, received additional bailout funding. His mission was doomed to fail from the start. It must be remembered that his coalition government is built upon Greek resistance and anger to the austerity measures.  The massive street protests cannot be explained away as isolated incidents of discontent. The Greek PM had to go to Germany and France on his hands and knees to ask for some breathing room. It is possible that Samara’s government will not withstand the failure to get concessions from the EZ. On the other hand Greece’s exit from the EZ is now a done deal.