lunes, 10 de agosto de 2015

lunes, agosto 10, 2015

Puerto Rico triggers historic default as austerity spiral deepens

America's home-grown "Greece" is trapped in a vicious circle as a shrinking economy and an exodus of workers pushes the debt ratio through the roof

By Ambrose Evans-Pritchard

9:30AM BST 04 Aug 2015

A homeless man stands in front of a closed down business in Puerta de Tierra in the outskirts of Old San Juan, Puerto Rico
A homeless man stands in front of a closed down business in Puerta de Tierra in the outskirts of Old San Juan, Puerto Rico Photo: AP
 
 
Puerto Rico has triggered the biggest municipal default in US history, risking years of bitter legal warfare with creditors and an austerity "death spiral" with echoes of Greece.

The island Commonwealth finally ran out of money on Monday after a desperate effort to stay afloat, and missed a final deadline for a $58m payment - handing over just $628,000.
 
It implies a sweeping default on much of its $72bn debt burden, equal to 100pc of Puerto Rico’s gross national product (GNP) and more than five times the debt ratio of California or Texas.
 

The Commonwealth is now in legal limbo, facing a well-organised pack of hedge funds that scooped up the debt at distressed levels and appears determined to extract maximum value in the courts, even if this means shutting down part of the island’s education system and social services.
 
Puerto Rico is not covered by the “Chapter Nine” bankruptcy code in the US, and therefore cannot resort to the sort of orderly debt restructuring that helped the city of Detroit to get back on its feet after defaulting in 2013.

By a quirk of law, it does not enjoy the partial protection of full US states. At the same time, it is unable to draw on support from the International Monetary Fund since it is not a sovereign country.

“We don’t know how the bankruptcy is going to proceed. It could easily turn into a free-for-all,” said Desmond Lachman, a former IMF division chief now at the American Enterprise Institute.

“If the hedge funds press for their pound of flesh, they could drive the economy into the ground. The more the economy tanks, the less tax they collect, and the more they have to tighten. It is crazy,” he said.



“They are in a similar situation to Greece, and this is what happens if you are asked to carry out too much fiscal adjustment in a fixed exchange monetary union. Their GDP has been shrinking by 1pc a year for the last decade,” he said.

A group of 34 hedge funds, led by Fir Tree Partners and Aurelius Capital, among others, has recruited a team of former-IMF officials to push their case that Puerto Rico is able to pay its debts if it reins in public spending.

They claim that the island is “massively overspending” on education, letting costs balloon by 39pc over the past decade even though school enrollment has collapsed by a quarter. The island has already closed more than 100 schools.



Puerto Rico’s governor, Alejandro Garcia Padillo, said drastic austerity would perpetuate the island’s “vicious cycle” as the shrivelling economy accelerates a mass exodus of the working-age cohort. The population has collapsed by 12pc in a decade.

“This is not about politics. It’s about maths. We have to make the economy grow. If not, we will be in a death spiral,” he said.

Puerto Rico has recruited its own IMF champion, the former deputy director Anne Kroeger.

Her report implicitly calls for a debt haircut of 35pc, roughly the current price of debt trading in the secondary market, though there are many types of bonds. Others say debt relief nearer 50pc will be necessary.



“There is no US precedent for anything of this scale and scope. No US state has restructured its debt in living memory. Any attempt faces unprecedented legal challenges,” she said.

Dr Kroeger said it would be self-defeating for creditors to push their demands too far given the vast fiscal gap that has built up over time. “There are limits to how much more expenditures can be cut or taxes raised. One has to be mindful of the hit to near-term growth from a sharper fiscal contraction; if output falls significantly, tax receipts will decline,” she said.

Several bills are now emerging in Congress that would grant Puerto Rico "Chapter Nine" protection and weaken the hand of creditors. Presidential candidates Hillary Clinton and Jeb Bush have both called for legal changes, all too conscious that this saga has become a neuralgic issue for Hispanic voters – a key swing constituency.

Yet the creditors have pushed home their narrative that Puerto Ricans are feckless, living beyond their means, and could easily pay if they tightened their belts. Great numbers of ordinary Americans bought the island’s debt because the interest was tax free.


This chart suggests Puerto Rico is under-taxed. Critics say it merely reflects the underlying economic depression


The parallels with Greece are striking, though they can be pushed too far. Nobel economist Paul Krugman says Puerto Rico is cushioned by fiscal buffers, pension payments and medical care under the US federal union, averting the sort of collapse in incomes seen in Greece.

Puerto Rico clearly allowed a debt crisis to creep up during the boom years, when the underlying rot was hidden from view and creditors lent without a second thought, banking on an implicit guarantee from the US sovereign state that did not in fact exist.

Yet it was also the victim of globalisation, or the “China effect”, which chipped away at mid-level economies caught too far down the manufacturing ladder, with relatively high wages and low productivity. Puerto Rico was unable to compete against this Asian onslaught after a special tax sweetner expired in 2006.

The Kroeger report said the island should be exempted from the US minimum wage in order restore competitiveness, a de facto call for an internal devaluation – an experiment pursued with varying results in Greece, Portugal, Latvia and Ireland.

For the world, Puerto Rico is becoming a test case of whether hedge funds and financial creditors can legitimately dictate terms to sub-sovereign states, or whether there is a greater social interest in limiting their legal powers.

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