Puerto Rico Defaults On $2 Billion In Debt Payments

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As expected, Puerto Rico will default on about $2 billion in debt payments Friday, including $780 million in constitutionally-backed general obligation bonds, as governor Alejandro Garcia Padilla has issued an executive order authorizing the suspension of payments. In addition, Garcia Padilla also declared states of emergency at the island's biggest public pension - the Commonwealth's Employee Retirement System - which is more than 99% underfunded, as well as the University of Puerto Rico and other agencies Reuters reports. The default will mark the first time a US territory has failed to pay on its general obligation bonds.

"Under these circumstances, these executive orders protect the limited resources available to the agencies listed in these orders and prevents that these can be seized by creditors, leaving Puerto Ricans without basic services," Garcia Padilla's administration said in a statement.

The suspension of payments comes just as the Senate rushed a bill to President Obama that was signed on Thursday, and the bill will now allow Puerto Rico to access a bankruptcy-like debt restructuring process for its roughly $70 billion in debt. As Bloomberg explains, the next phase will now be for the US appointed control board to begin the restructuring negotiation process. The step allows Garcia Padilla to use cash that would otherwise go to investors to avert cuts to schools, policing and health care that Garcia Padilla said would extract a heavy toll on the island where nearly half of the 3.5 million residents live in poverty.

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Empire of Lies: How the US Continues to Deceive the World About Puerto Rico

Truthout Stories 

 

Puerto Ricans have watched the US government lie brazenly and repeatedly -- to the American people and the world -- about its actions and interests in the Caribbean. Now, members of Congress are trying to lower Puerto Rico's minimum wage for young people.

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"There are three kinds of lies," said Mark Twain. "Lies, damned lies, and statistics." Unfortunately for Puerto Rico, this is not an aphorism; it is an operating principle.

Separated by an ocean and a language from the mainland, Puerto Ricans have watched the US government lie brazenly and repeatedly -- to the American people and the world at large -- about its actions and interests in the Caribbean.

The latest walk down liar's lane is a cut to the minimum wage, as proposed by the US House of Representatives' Committee on Natural Resources.

Efforts to Lower the Minimum Wage

On April 12, 2016, the House Committee on Natural Resources released HR 4900: the Puerto Rico Oversight, Management, and Economic Stability Act, with the acronym of PROMESA. The bill creates a Financial Control Board, which will act as a collection agency for the hedge funds/vulture funds throughout the island.

Taking their cue from The Wall Street Journal, The Washington Post, the Krueger Report and a study commissioned by 34 hedge funds, the committee decided that a "good" way to spark the Puerto Rican economy and improve the lives of its residents would be to lower their minimum wage ... so they stuck that in the bill, as well.

This appears in Section 403 of PROMESA (p. 75-6) with intentionally convoluted language. The section title, "First Minimum Wage in Puerto Rico," suggests that Congress is creating a minimum wage on the island. It then requires you to read Section (6)(g)(4) of the Fair Labor Standards Act.

Only then do you realize that PROMESA will cut the minimum wage of newly hired young workers throughout the island, from $7.25 to $4.25 per hour. This will apply to everyone aged 20 to 24, whenever they start a new job.

In Puerto Rico, there are over 200,000 people in this age bracket. Many of them are paying student loans. Few of them can afford to live on $4.25 per hour, unless they continue to live with their parents.

The supply-side argument that this will "create more jobs and economic development on the island" is woefully myopic. At $4.25 per hour, $170 per week, $8,840 per year, a young worker will make 25 percent of the per capita income of a resident of Mississippi, the poorest state in the US. Someone needs to explain to the House Committee on Natural Resources that this is not "economic development." It is indentured servitude that smells of racism.

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These Are The 8 Triggers For A New Financial Crisis

The Independent

There are a number of potential triggers to a new crisis.

The first potential trigger may be equity prices.
 
The US stock market runs into trouble. A stronger dollar affects US exports and foreign earnings. Emerging market weakness affects businesses in the technology, aerospace, automobile, consumer products and luxury product industries. Currency devaluations combined with excess capacity, driven by debt fuelled over-investment in China, maintain deflationary pressures reducing pricing power. Lower oil prices reduce earnings, cash flow and asset values of energy producers. Overinflated technology and bio-tech stocks disappoint.

Earnings and liquidity pressures reduce merger activity and stock buybacks which have supported equity values. US equity weakness flows into global equity markets.

The second potential trigger may be debt markets. Heavily indebted energy companies and emerging market borrowers face increased risk of financial distress.
According to the Bank of International Settlements, total borrowing by the global oil and gas industry reached US$2.5 trillion in 2014, up 250 percent from US$1 trillion in 2008.

The initial stress will be focused in the US shale oil and gas industry which is highly levered with borrowings that are over three times gross operating profits. Many firms were cash flow negative even when prices were high, needing to constantly raise capital to sink new wells to maintain production. If the firms have difficulty meeting existing commitments, then decreased available funding and higher costs will create a toxic negative spiral.

A number of large emerging market borrowers, such as Brazil’s Petrobras, Mexico’s Pemex and Russia’s Gazprom and Rosneft, are also vulnerable. These companies increased leverage in recent years, in part due to low interest rates to finance significant operational expansion on the assumption of high oil prices.

These borrowers have, in recent years, used capital markets rather than bank loans to raise funds, cashing in on demand from yield hungry investors. Since 2009, Petrobras, Pemex and Gazprom (along with its eponymous bank) have issued US$140 billion in debt. Petrobras alone has US$170 billion in outstanding debt. Russian companies such as Gazprom, Rosneft and major banks have sold US$244 billion of bonds. The risk of contagion is high as institutional and retail bond investors worldwide are exposed.

A third possible trigger may be problems in the banking system fed by falling asset prices and non-performing loans. European banks have around €1.2 trillion in troubled loans. Chinese and Indian bank problem loans are also high.

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Default Nears: UBS’s Puerto Rico Bond Funds Implode, “Collateral Value” Drops to Zero, Investors Screwed

Wolf Street 

 “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.

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Puerto Rico Says Services Come Before Agency Debt Payment

Bloomberg

Puerto Rico’s budget director ratcheted up the risk of a default on some agency securities, saying cash from the commonwealth’s operating budget won’t be redirected to make debt payments due next month.

The comments from Luis Cruz, director of the Office of Management and Budget, come as Standard & Poor’s slashed its rating on the Public Finance Corp.’s bonds to CC from CCC-, calling an Aug. 1 default on the securities a “virtual certainty.”

Puerto Rico said last week the agency failed to transfer $36.3 million to a trustee to cover the Aug. 1 debt payment because the legislature didn’t appropriate the funds. Governor Alejandro Garcia Padilla last month directed island officials to create a debt-restructuring plan by Aug. 30, saying the commonwealth can’t sustain its $72 billion debt burden.

“We all know the difficult situation we are facing in terms of cash flow,” Cruz said during a press conference Monday in San Juan. “And we have to decide how we handle that cash flow and our priority is to provide services to citizens: health, safety, education.”

A $1 million block of Public Finance Corp. tax-exempt bonds maturing August 2024 traded Monday at 24.5 cents on the dollar, for a yield of 31.8 percent, according to data compiled by Bloomberg.

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Thanks to Wall Street, America Has Growing Greek-Like Debt Bombs

Wall Street on Parade

Greece has two things in common with bankrupt or teetering parts of the United States: it took advice and money from Wall Street while paying huge fees; now the catastrophic results of that bad advice is falling on the backs of the poor and most vulnerable citizens. In fact, we’re all Greeks now.

From the $1.2 trillion in student debt now on the backs of U.S. college students, a growing number of whom are turning to prostitution to keep up, to teetering Puerto Rico, the bankruptcy of Jefferson County, Alabama in 2011, Detroit’s bankruptcy in 2013, Wall Street was on hand to grease the skids or set the train wreck in motion.

As Greece pensioners line up outside of banks today to receive a fraction of their monthly pension, Puerto Rico has acknowledged it can’t pay its $72 billion in debt and has imposed a stunning 11.5 percent sales tax on its struggling citizens.

How did Puerto Rico, with a tiny population of just 3.6 million, get itself into such astronomical debt? In October 2013, the Wall Street Journal’s Michael Corkery and Mike Cherney reported that Wall Street banks, led by Citigroup and UBS, since 2006 had sold 87 Puerto Rico debt deals totaling $61 billion. For burying Puerto Rico under debt, the reporters note that Wall Street, its lawyers and related parties received $1.4 billion in fees.

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