Tag Archives: Puerto Rico

They Said That? 8/3/15

Puerto Rico defaulted today on bonds issued by its Public Finance Corporation, making only a partial payment on interest due. The only surprise is that Puerto Rico has been able to delay the inevitable for as long as it has. Its finances have been a mess and its economy in shambles for years, and prudent municipal bond investors have stayed away. However, there are a lot of imprudent individual investors and mutual funds who bought Puerto Rico debt; they are looking at substantial losses and years of litigation. More and more debt dominoes are falling faster and faster (see “Pop Goes The Alpha (Natural Resources)“). From “Moody’s says Puerto Rico has defaulted,” cnbc.com:

Puerto Rico’s Government Development Bank announced Monday that it was only able to make a partial payment on its Public Finance Corporation (PFC) debt service due over the weekend.

In response to the non-payment of the full service, Moody’s said it viewed the situation as a default.

“Due to the lack of appropriated funds for this fiscal year the entirety of the PFC payment was not made today (the first business day after the Saturday deadline),” GDB President Melba Acosta-Febo said in a statement. This was a decision that reflects the serious concerns about the Commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico to ensure the essential services they deserve are maintained.”

Still, Acosta-Febo revealed that PFC was able to make a partial payment of interest for its outstanding bonds.

“The partial payment was made from funds remaining from prior legislative appropriations in respect of the outstanding promissory notes securing the PFC bonds. In accordance with the terms of these bonds, which stipulate that these obligations are payable solely from funds specifically appropriated by the Legislature, PFC applied these funds—totaling approximately $628,000—to the August 1 payment,” Acosta-Febo added.

Puerto Rico owed several debt payments on August 1, including $58 million on the Public Finance Corporation bonds.

“Moody’s views this event as a default,” Emily Raimes, vice president at Moody’s Investors Service, said in a statement, adding that payment of “debt service on these bonds is subject to appropriation, and the lack of appropriation means there is not a legal requirement to pay the debt, nor any legal recourse for bondholders.

“This event is consistent with our belief that Puerto Rico does not have the resources to make all of its forthcoming debt payments. This is a first in what we believe will be broad defaults on commonwealth debt,” she added.

Standard and Poor’s separately classified the lack of payment as a default, lowering the Public Finance Corporation debt to a “D” rating from “CC.”

“We believe the default signals severe liquidity distress, whereby Puerto Rico must now choose among which financial obligations it can honor, and presages other possible defaults as liquidity becomes further constrained during the next few months,” S&P said in a statement Monday.

Separately, a regulatory filing indicated that Puerto Rico had temporarily suspended monthly deposits to its general obligation redemption fund, Reuters reported Monday afternoon.

Oppenheimer Funds—one of the largest holders of Puerto Rican debt—said it was “disappointed” by the partial payment.

“As we have stated, we will vigorously defend the terms of the bond indentures. We have been managing investment in Puerto Rico for more than 20 years, and remain steadfast in serving the long-term interests of our shareholders,” Oppenheimer said in a statement Monday.

http://www.cnbc.com/2015/08/03/puerto-rico-paid-just-628k-toward-aug-1-debt-repayment.html

UBS’s Puerto Rico Bond Funds Implode, “Collateral Value” Drops to Zero, Investors Screwed, by Wolf Richter

Here are phrases you will be hearing a lot of in the next few months: first, second, third, fourth, fifth, etc. order effects. Case in point: UBS sells bond funds that buy Puerto Rico municipal bonds, some of which UBS underwrote. Puerto Rico is deep in the hole and probably won’t make payment on some of the bonds. That’s the first order effect. Some of UBS’s customers have borrowed money using their bond funds as collateral. That’s the second order effect. UBS has just told its customer that it has marked their collateral down to zero, which means they can no longer borrow against those bond funds. The customers have to either come up with more money or sell their bond funds, almost certainly at a loss. That’s a third order effect. The diminution in their net worth may reduce their consumption, saving, investment, or, in extreme cases, their ability to pay their creditors, fourth order effects. And that’s how defaults unravel daisy chains of debt. From Wolf Richter, at wolfstreet.com:

“We believe that the probability of default is approaching 100 percent, and that losses given default are substantial,” Moody’s wrote on Wednesday about Puerto Rico’s $72 billion in bonds that were stuffed into numerous conservative-sounding bond funds spread across America’s retirement portfolios.

“Bondholder recoveries will be lowest on securities lacking explicit contractual or other legal protections,” the report went on, according to Bloomberg. About $26 billion in bonds fall into this category, issued by entities such as the Government Development Bank, Highways and Transportation Authority, Infrastructure Finance Authority, and Municipal Finance Authority. Investors in these bonds might recover only 35 cents on the dollar.

Recovery rates for bonds with stronger investor protections, such as general obligation bonds, would likely range from 65% to 80%, Moody’s said.

But those recovery rates, as dire as they seem, only apply if you own the bonds outright. If you own those bonds in a bond fund, the scenario may look much, much worse, according to what UBS just did.

Turns out, some of these bonds were underwritten by UBS and stuffed with other Puerto Rico bonds into its own Puerto Rico closed-end bond funds and sold to its own unsuspecting clients. These funds aren’t traded; UBS sets the value.

And UBS, despite the well-known problems Puerto Rico has been having for years, wasn’t shy about loading up its clients up with these bonds, apparently, according to Reuters:

Many UBS brokers had misgivings about the funds even as UBS’ Puerto Rico chairman was pushing them to sell the bonds, according to a voice recording, reported by Reuters in February.

And then there was leverage, as recommended by UBS brokers because UBS profits even more, not only in selling the bond funds but also in lending the money:

Many of those investors bought even more fund shares with money they borrowed through credit lines from another UBS unit, after several UBS brokers may have improperly advised them to do so, according to a $5.2 million settlement between UBS and Puerto Rico’s financial regulator in 2014.

Since the collapse of Puerto Rico bonds, the funds have become “legal headaches for the firm,” as Reuters put it, with the FBI “investigating allegations about UBS’ sales practices that touted the funds’ high yields and tax advantages.”

OK, looks like these funds have become a sordid business. But as unlikely as it may seem, they just now got even more sordid:

UBS sent out a letter to its clients on July 13, and at least one of those incensed recipients must have leaked a copy to Reuters. In this letter, UBS said that it “will also reduce to zero the collateral value assigned to all Puerto Rico closed-end funds shares.”

To zero!

Clients were warned that they can no longer use these funds as collateral for loans, even those loans they used to buy these funds with in the first place.

To continue reading: UBS’s Puerto Rico Bond Funds Implode

How Socialism Destroyed Puerto Rico, and How Capitalism Can Save It, by Peter Schiff

From Peter Schiff of Euro Pacific Capital, via davidstockmanscontracorner.com:

While Greece is now dominating the debt default stage, the real tragedy is playing out much closer to home, with the downward spiral of Puerto Rico. As in Greece, the Puerto Rican economy has been destroyed by its participation in an unrealistic monetary system that it does not control and the failure of domestic politicians to confront their own insolvency. But the damage done to the Puerto Rican economy by the United States has been far more debilitating than whatever damage the European Union has inflicted on Greece. In fact, the lessons we should be learning in Puerto Rico, most notably how socialistic labor and tax policies can devastate an economy, should serve as a wake up call to those advocating prescribing the same for the mainland.

The U.S. has bombed the territory of Puerto Rico with five supposedly well-meaning, but economically devastating policies. It has:

1. Exempted the Island’s government debt from all U.S. taxes in the Jones-Shaforth Act.
2. Eliminated U.S. tax breaks for private sector investment with the expiration of section 936 of the U.S. Internal Revenue Code.
3. Required the nation to abide by a restrictive trade arrangement.
4. Made the Island subject to the U.S. minimum wage.
5. Enabled Puerto Rico to offer generous welfare benefits relative to income.

While passage of such politically popular laws seems benign on the surface (and have allowed politicians to claim that their efforts have helped the poorest Puerto Ricans), in reality they have deepened the poverty of the very people the laws were supposedly designed to help. The lessons here are so obvious that only the most ardent supporters of government economic control can fail to comprehend them.

To continue reading: How Socialism Destroyed Puerto Rico

The Facade Crumbles, by Robert Gore

That governments and central banks can “manage” economies and financial markets is a delusion that only receives widespread acceptance when financial markets rise in tandem with activist measures. Just because two things happen at the same time, or one after the other, does not mean one causes the other. However, that’s how superstitions are born, and the “potent directors” superstition refuses to die.

Governments’ two macroeconomic “tools” are issuing debt and taking money out of some pockets to put in other, more politically favored pockets. Central banks monetize debt, print money, and suppress interest rates. It is a mystery why anyone thinks that debt, coercion, entries on a computer screen, counterfeit fiat scrip, and price controls can dictate economic outcomes. The course of economies and financial markets are ultimately determined by the decentralized production, consumption, saving, and investment decisions and actions of millions of people, and those decisions and actions are affected by powerful waves of crowd psychology.

During the 2007-2009 financial crises, governments and central banks around the world frantically announced measures and promulgated jerry-built programs to arrest falling markets. The measures and programs produced sharp but brief rallies that were quickly reversed, overwhelmed by panic and unraveling debt. One of the wonders of the six years since US equity markets reached bottom in 2009 is how quickly the disillusionment faded and the potent directors superstition again seized the public imagination.

The foundation of the so-called recovery since 2009 has been quicksand: huge increases in public debt; moving private debt onto public balance sheets; central bank monetization of that debt, and artificially low interest rates—to mask the true cost to governments of their debt and promote economic activity and rising asset markets. Now the whole ugly edifice is sinking, but the belief persists that it can be stopped by pouring in more quicksand! If that belief was delusional before, to retain it after the events of the last few months is psychosis unhinged from reality.

In “Oil Ushers in the Depression” (SLL, 12/1/14), SLL said the oil glut and its precipitous fall in price were a harbinger of things to come, a prelude to falling prices and contracting economic activity. This occurred not despite years of quicksand policies, but because of them. The biggest global debt monetization and central bank balance sheet expansion in history did not stop the deflation in oil and other commodities. The article’s predictions rested on the analysis from two other SLL articles: “A Skyscraper of Cards,” 10/19/14, and “The Economics of Debt, Deterioration, Deflation, Depression, and Disorder,” 11/17/14. That analysis will not be repeated here (interested readers are referred to those articles). What is important is that the measures taken the last six years will, now that debt is unraveling and euphoria and greed are giving way to despair and fear, make the coming crash much worse.

If the steep fall in the prices of oil and other industrial commodities hasn’t been enough of a wake up call about the burgeoning debt disaster and government and central bank inability to stop it, then Greece and Puerto Rico should be a croquet mallet applied hard upside the head. When Greece first ran into problems in 2010, it had about €110 billion in debt. After two “rescues” it has €340 billion in debt and is bankrupt. The Greek referendum served welcome notice of a simple but often overlooked truth: the ability of any government to pay its debts rests on the willingness of its constituents to pay (see “Oxi! Greece’s 9.0 Earthquake,” SLL, 7/5/15). Greece’s politicians may knuckle under to pressure from the European Union and the US government, accepting proposals their voters so recently rejected, but now it is apparent to all: promises by governments can be repudiated by the people who are expected to pay for them.

Governments may not allow any more debt referendums in the future, but people vote with their feet, or stay where they are and work only hard enough to provide for themselves. Which is what has happened in Puerto Rico, whose governor recently announced that it could not pay all its debts. Any Puerto Rican with ambition and a willingness to work has already left or is planning to. Why hang around for perpetual depression and debt serfdom? Meanwhile, many of the individuals and mutual fund managers in the US who own Puerto Rico’s debt have seen the value of their bonds plummet, but are still hoping that someone, somewhere (i.e., the US government) will be stupid enough to bail them out. Keep hoping.

If anybody could manage an economy and financial markets, it would be the Chinese government, which can seemingly do what it wants. Belief in that government runs deep in the financial markets. It has rested on the Chinese economic “miracle,” and was reinforced by a massive expansion of credit expansion during the depths of the financial crisis in 2008 and 2009 that appeared to miraculously prolong the miracle. It is disturbing that even in supposed bastions of capitalism more participants believe in the Chinese government’s totalitarian command and control than believe in capitalism and unfettered markets.

However, whether it gets repaid or not, there is always a pay back with debt. The slowing Chinese economy and the crack up of Chinese stock markets the past few weeks after a huge margin-fueled and government-promoted run up, despite emergency measure after emergency measure, demonstrates that Chinese leaders and bureaucrats are just as ineffectual as the US’s were in 2008. While SLL believes the future belongs to Asia (see “Buy Asia; Short the US and Europe,” SLL, 2/3/15, and “Trading Places,” SLL, 6/27/15) markets and more importantly, crowd psychology, are bigger than governments. Panic will eventually exhaust itself and markets will find their own level, as US markets did in March, 2009, but in the interim, the Chinese government’s measures will make matters worse, just as the US government’s did. Some things never change.

The acceleration point of the debt and deflation crisis has been reached (see “Crisis Progress Report (8): Acceleration,” SLL, 7/2/15, and “Acceleration Confirmed,” SLL, 7/13/15). Things will happen much quicker now, which means the time to prepare was yesterday. If unprepared, you’ll probably not get everything done you should get done, but that does not mean the effects of the looming disaster cannot be mitigated. Greeks who took most of their money out of banks and stocked up on supplies are much better off than those now reduced to €60 daily withdrawals and scouring near-empty stores. Chinese investors and owners of Puerto Rico bonds who “panicked” and sold “too early” are breathing much easier than those who are stuck and pondering selling into illiquid markets. Or not being able to sell at all either because selling of their particular security has been banned or markets have been suspended.

We no longer have the illusory luxuries of time, delusion, or hope in governments, central banks, and mainstream propaganda. The facade is crumbling. Are you ready? For ideas, strategies, and common sense, check out preparedness websites. Survival Blog and the Western Rifle Shooters Association’s articles and blog rolls are good places to start. For separating financial fact from mainstream fiction—and cogent analyses—see SLL David Stockman’s Contra Corner, and Zero Hedge, and their blog rolls, and Elliott Wave International. The latest edition of Robert Prechter’s book Conquer The Crash is a must read. Get to know your neighbors and seek out the like-minded. When the wheels fall off, there will be much that is ignoble and heinous. However, there are many great people out there, and they will perpetuate a proud American tradition: helping each other out.

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Why The Puerto Rico Debt Crisis Is Such A Huge Threat To The U.S. Financial System, by Michael Snyder

From Michael Snyder, at theconomiccollapseblog.com:

The debt crisis in Puerto Rico could potentially cost financial institutions in the United States tens of billions of dollars in losses. This week, Puerto Rico Governor Alejandro Garcia Padilla publicly announced that Puerto Rico’s 73 billion dollar debt is “not payable,” and a special adviser that was recently appointed to help straighten out the island’s finances said that it is “insolvent” and will totally run out of cash very shortly. At this point, Puerto Rico’s debt is approximately 15 times larger than the per capita median debt of the 50 U.S. states. Yes, the Greek debt crisis is larger, as Greece currently owes about $350 billion to the rest of the planet. But only about $14 billion of that total is owed to U.S. financial institutions. But with Puerto Rico, things are very different. Just about the entire 73 billion dollar debt is owed to U.S. financial institutions, and this could potentially cause massive problems for some extremely leveraged Wall Street firms.

There is a reason why Puerto Rico is called “America’s Greece”. In Puerto Rico today, more than 40 percent of the population is living in poverty, the unemployment rate is over 12 percent, and the economy of the small island nation has continually been in recession since 2006.

Yet all this time Puerto Rico has continued to pile up even more debt. Finally, it has gotten to the point where all of this debt is simply unpayable…

Steven Rhodes, the retired U.S. bankruptcy judge who oversaw Detroit’s historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment on Monday.

Puerto Rico “urgently needs our help,” Rhodes said. “It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer,” he added.

This is why I hammer on the danger of U.S. government debt so often. As we see with the examples of Greece and Puerto Rico, eventually a day of reckoning always arrives. And when the day of reckoning arrives, power shifts into the hands of those that you owe the money too.

To continue reading: The Puerto Rico Debt Crisis

See also “Crisis Progress Report (8): Acceleration,” SLL, 7/2/15

Puerto Rico Governor Speaks Truth To Hedge Fund Speculators: “The Debt Is Not Payable…..I Will Not Kick the Can”, by Michael Corkery and Mary Williams Walsh

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