This is how debt crises work. There is a seemingly isolated debt “problem” somewhere. It gets fixed, or the debtor goes bankrupt. Then another problem crops up, and it too either gets fixed or the debtor goes bankrupt. Then multiple problems appear, usually concentrated in one sector or geographic area. This presents a bigger problem. There are more debtors, and importantly, there are more creditors. Maybe some of those creditors have debts, too, maybe in fact they’re overextended. Now, like ripples on a lake where a stone has been dropped, credit problems spread. It is not contagion, although that word is always used. Rather, it is due to growth in debt for a significant period of time in excess of underlying growth, and it is due to the fact that virtually every financial asset is somebody else’s financial liability.
This week we get two big ripples that will undoubtedly meet, amplifying each other and other debt ripples (a property of wave physics), causing more financial stress: Greece and Puerto Rico. Michael Corkery and Mary Williams Walsh at The New York Times report, via davidstockmanscontracorner.com, on the Puerto Rico debt situation:
Puerto Rico’s governor, saying he needs to pull the island out of a “death spiral,” has concluded that the commonwealth cannot pay its roughly $72 billion in debts, an admission that will probably have wide-reaching financial repercussions.
The governor, Alejandro García Padilla, and senior members of his staff said in an interview last week that they would probably seek significant concessions from as many as all of the island’s creditors, which could include deferring some debt payments for as long as five years or extending the timetable for repayment.
“The debt is not payable,” Mr. García Padilla said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”
It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.
A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the United States municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.
That market has already been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and elsewhere, which undercut assumptions that local governments in the United States would always pay back their debt.
Puerto Rico’s bonds have a face value roughly eight times that of Detroit’s bonds. Its call for debt relief on such a vast scale could raise borrowing costs for other local governments as investors become more wary of lending.
Perhaps more important, much of Puerto Rico’s debt is widely held by individual investors on the United States mainland, in mutual funds or other investment accounts, and they may not be aware of it.
Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out.
Still, Mr. García Padilla said that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts.
He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.
“If they don’t come to the table, it will be bad for them,” said Mr. García Padilla, who plans to speak about the fiscal crisis in a televised address to Puerto Rico residents on Monday evening. “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”
To continue reading: Puerto Rico’s Debt Is Not Payable
