America's Own Little Greece
August 3, 2015 5:35 PM Subscribe
Puerto Rico Default: How We Got Here And What Happens Next "But Puerto Rico is unlikely to get much out of Washington. Despite calls by Treasury Secretary Jack Lew and presidential hopefuls Jeb Bush and Hillary Clinton to let Puerto Rico use bankruptcy court, conservative lawmakers aren’t likely to allow it because they fear the reprisals of constituencies that regard municipal bankruptcies as backdoor bailouts."
" 'The warning signs have been out for years about Puerto Rico and its extraordinary debt,' Colby says. 'But investors have been making the presumption that Puerto Rico would somehow find support financially from U.S. Congress.'
"And now, some mutual funds have such large holdings of Puerto Rico’s debt that they can’t afford to exit the territory. An economic disaster could occur if they all chose to dump their bonds in a short period of time."
"Critics say the reason Puerto Rico was able to amass so much debt was because lenders took advantage of the island’s tax-free bond status, and they should accept the consequences of the risks by absorbing the brunt of the pain."
How Wall Street Has Profited From Puerto Rico's Misery.
Congress Could Make US Retirees Shoulder Puerto Rico’s Debt
The Puerto Rico Crisis, Explained (Warning: Vox)
Previously
" 'The warning signs have been out for years about Puerto Rico and its extraordinary debt,' Colby says. 'But investors have been making the presumption that Puerto Rico would somehow find support financially from U.S. Congress.'
"And now, some mutual funds have such large holdings of Puerto Rico’s debt that they can’t afford to exit the territory. An economic disaster could occur if they all chose to dump their bonds in a short period of time."
"Critics say the reason Puerto Rico was able to amass so much debt was because lenders took advantage of the island’s tax-free bond status, and they should accept the consequences of the risks by absorbing the brunt of the pain."
How Wall Street Has Profited From Puerto Rico's Misery.
Congress Could Make US Retirees Shoulder Puerto Rico’s Debt
The Puerto Rico Crisis, Explained (Warning: Vox)
Previously
If I had an 8 day vacation planned in Puerto Rico in December, should I be at all concerned about how this closer to home debt crisis might impact said vacation?
posted by COD at 6:04 PM on August 3, 2015
posted by COD at 6:04 PM on August 3, 2015
COD: The short answer: No.
The Spanish answer: No.
posted by dances_with_sneetches at 6:07 PM on August 3, 2015 [2 favorites]
The Spanish answer: No.
posted by dances_with_sneetches at 6:07 PM on August 3, 2015 [2 favorites]
Why do "conservative lawmakers" have any say in whether or not Puerto Rico gets its day in court? If I was declaring bankruptcy I wouldn't need John Boehner's permission.
Detroit used bankruptcy court, and this seems like the same kind of problem. Why wouldn't Puerto Rico use the same procedure?
posted by foobaz at 6:13 PM on August 3, 2015
Detroit used bankruptcy court, and this seems like the same kind of problem. Why wouldn't Puerto Rico use the same procedure?
posted by foobaz at 6:13 PM on August 3, 2015
Because Puerto Rico can't use the same procedure. It's not a city.
posted by introp at 6:15 PM on August 3, 2015
posted by introp at 6:15 PM on August 3, 2015
Detroit used bankruptcy court, and this seems like the same kind of problem. Why wouldn't Puerto Rico use the same procedure?
Because, what, Banksters are just supposed to take chances that a loan might carry some risk ?
posted by Pogo_Fuzzybutt at 6:29 PM on August 3, 2015 [4 favorites]
Because, what, Banksters are just supposed to take chances that a loan might carry some risk ?
posted by Pogo_Fuzzybutt at 6:29 PM on August 3, 2015 [4 favorites]
Why do "conservative lawmakers" have any say in whether or not Puerto Rico gets its day in court? If I was declaring bankruptcy I wouldn't need John Boehner's permission.
Detroit used bankruptcy court, and this seems like the same kind of problem. Why wouldn't Puerto Rico use the same procedure?
From the third link:
"When Congress empowered U.S. states to authorize Chapter 9 bankruptcies, he explains, it explicitly denied the privilege to Puerto Rico and the District of Columbia. As a sort of compensation, Congress made Puerto Rico’s government debt tax-exempt, helping the territory become the third-largest issuer of municipal bonds in the United States."
From the Vox article:
"8) So is Puerto Rico going bankrupt like Detroit did?
"No. People throw the word bankrupt around a lot, but it actually has a specific technical meaning laid out in the US Bankruptcy Code and other laws. There are a lot of different kinds of bankruptcy, and they all lay out one way or another for an person or organization that cannot pay back its debts to restructure its payments and move forward. The key is that bankruptcy is an organized, rule-governed process designed to bring some clarity to the situation and ideally to resolve it sooner rather than later.
"But US bankruptcy law makes no provision for Puerto Rico (or a US state) to declare bankruptcy."
It's not entirely clear to me from what I found, and I wasn't able to find anything else that made it clearer, but it sounds like that while states and the municipalities therein have access to bankruptcy based on US bankruptcy law, non-state US territories, including DC, do not have the capability to access it. So Congress would be required to make it available to Puerto Rico.
posted by Caduceus at 6:35 PM on August 3, 2015 [3 favorites]
Detroit used bankruptcy court, and this seems like the same kind of problem. Why wouldn't Puerto Rico use the same procedure?
From the third link:
"When Congress empowered U.S. states to authorize Chapter 9 bankruptcies, he explains, it explicitly denied the privilege to Puerto Rico and the District of Columbia. As a sort of compensation, Congress made Puerto Rico’s government debt tax-exempt, helping the territory become the third-largest issuer of municipal bonds in the United States."
From the Vox article:
"8) So is Puerto Rico going bankrupt like Detroit did?
"No. People throw the word bankrupt around a lot, but it actually has a specific technical meaning laid out in the US Bankruptcy Code and other laws. There are a lot of different kinds of bankruptcy, and they all lay out one way or another for an person or organization that cannot pay back its debts to restructure its payments and move forward. The key is that bankruptcy is an organized, rule-governed process designed to bring some clarity to the situation and ideally to resolve it sooner rather than later.
"But US bankruptcy law makes no provision for Puerto Rico (or a US state) to declare bankruptcy."
It's not entirely clear to me from what I found, and I wasn't able to find anything else that made it clearer, but it sounds like that while states and the municipalities therein have access to bankruptcy based on US bankruptcy law, non-state US territories, including DC, do not have the capability to access it. So Congress would be required to make it available to Puerto Rico.
posted by Caduceus at 6:35 PM on August 3, 2015 [3 favorites]
Investors operated under the assumption that buying Puerto Rican bonds was a so-called safe way to boost returns on investment. The implicit theory was that the U.S. government would back the commonwealth government when things turned sour.
Wall Street was counting on a Puerto Rican bailout from the beginning. In a rational world, Congress and the Fed would step in and extend bankruptcy protection, up to and including nationalizing all state services for a time and invalidating all bond obligations. Investors who take shitty risks deserve to lose everything, and banks shouldn't be permitted to securitize private profits backed by the literal future of an entire state of people (territory, in this case). That's the fundamental definition of how the market is supposed to work
Instead what will happen is austerity, always and forever, because the only people* who matter are Goldman Sachs and JP Morgan. The "free" market is rigged from the top, and the little people of Puerto Rico must pay in full, at any cost.
* - as in, literal people, my friends. Special, special people who are better than you in every imaginable way and own you like medieval serfs, because you are nothing compared to the quarterly bonus pool.
posted by T.D. Strange at 6:39 PM on August 3, 2015 [21 favorites]
Wall Street was counting on a Puerto Rican bailout from the beginning. In a rational world, Congress and the Fed would step in and extend bankruptcy protection, up to and including nationalizing all state services for a time and invalidating all bond obligations. Investors who take shitty risks deserve to lose everything, and banks shouldn't be permitted to securitize private profits backed by the literal future of an entire state of people (territory, in this case). That's the fundamental definition of how the market is supposed to work
Instead what will happen is austerity, always and forever, because the only people* who matter are Goldman Sachs and JP Morgan. The "free" market is rigged from the top, and the little people of Puerto Rico must pay in full, at any cost.
* - as in, literal people, my friends. Special, special people who are better than you in every imaginable way and own you like medieval serfs, because you are nothing compared to the quarterly bonus pool.
posted by T.D. Strange at 6:39 PM on August 3, 2015 [21 favorites]
Not just austerity, T.D. Strange, but the large scale piracy of public works. PR is going to be pressured to sell off public property at bargain-basement gun-under-the-newspaper "that's a real nice territory you got there, shame if something happened to it" prices.
posted by introp at 6:51 PM on August 3, 2015 [5 favorites]
posted by introp at 6:51 PM on August 3, 2015 [5 favorites]
Bankruptcy is the only incentive that institutional investors have to be careful with their shareholders' money. Otherwise, they'll always be chasing bubbles and tulips.
posted by klangklangston at 6:51 PM on August 3, 2015
posted by klangklangston at 6:51 PM on August 3, 2015
Remember, if you borrow beyond your ability to repay, you are a bad bad person (slash-government) and deserve whatever ruin befalls you for your shortsightedness. If you lend to someone who is clearly borrowing beyond their ability to repay, or even enthusiastically and on purpose encourage people to borrow (from you, natch) beyond their ability to repay, you are an innocent victim who must be made whole by any means necessary.
posted by Holy Zarquon's Singing Fish at 6:53 PM on August 3, 2015 [22 favorites]
posted by Holy Zarquon's Singing Fish at 6:53 PM on August 3, 2015 [22 favorites]
Puerto Rico is indeed a lot like the Greece. It can't devalue to pay its debts, because its currency is the USD. Also, it doesn't enjoy the sorts of transfer payments poorer US states get from richer states (like CA to Kentucky).
posted by persona au gratin at 6:59 PM on August 3, 2015 [4 favorites]
posted by persona au gratin at 6:59 PM on August 3, 2015 [4 favorites]
Eligibility to be a debtor under the U.S. Bankruptcy Code is governed by 11 U.S.C. § 109 ("Who may be a debtor").
§ 109(c) provides that an entity can be a debtor under chapter 9 only if it is a municipality. (There are additional requirements—the state has to authorize the municipality to file, the municipality must be insolvent, the municipality must negotiate with its creditors, etc.) There is no other chapter of the Bankruptcy Code that would permit a governmental unit to become a debtor.
§ 101(40) defines "municipality" to mean "political subdivision or public agency or instrumentality of a State."
§ 101(52) defines "State" to include "the District of Columbia and Puerto Rico, except for the purpose of defining who may be a debtor under chapter 9 of this title."
So in conclusion:
1. No state can become a debtor under the Bankruptcy Code. Only a municipality can become a debtor under chapter 9, and only when authorized by its state. (As a side note, I have no idea which state would be responsible for authorizing something like the Port Authority of New York and New Jersey to file. But hopefully that eventuality will never arise.)
2. The states are allowed, but not required, to authorize their municipalities to file for chapter 9 protection. (The last time I checked, about half the states had statutes authorizing their municipalities to file cases under chapter 9.) However, Puerto Rico and D.C. are not permitted to do so. Their municipalities are flatly ineligible for protection under chapter 9 of the Bankruptcy Code, as it is currently drafted.
3. There is some conceivable wiggle room here. A municipality in Puerto Rico cannot file a chapter 9 petition. But a corporation in Puerto Rico can file a chapter 11 petition. Often municipalities are registered as corporations. That doesn't mean that they are corporations for Bankruptcy Code purposes, but at least the argument can be made. This is what happened in the case of the Las Vegas Monorail. Creditors claimed it was a municipality and tried to get the case dismissed (Nevada had not authorized it to file a petition), but the court ruled that it was a corporation entitled to be a debtor under chapter 11. (A corporation does not need state authorization to file a petition.)
Puerto Rico tried drafting its own insolvency statute, but the First Circuit Court of Appeals struck it down, holding that it was preempted by the Bankruptcy Code. Here is a link (PDF) to the decision, but I don't know how long that link will work. The concurrence is very interesting.
posted by sudo intellectual at 7:05 PM on August 3, 2015 [9 favorites]
§ 109(c) provides that an entity can be a debtor under chapter 9 only if it is a municipality. (There are additional requirements—the state has to authorize the municipality to file, the municipality must be insolvent, the municipality must negotiate with its creditors, etc.) There is no other chapter of the Bankruptcy Code that would permit a governmental unit to become a debtor.
§ 101(40) defines "municipality" to mean "political subdivision or public agency or instrumentality of a State."
§ 101(52) defines "State" to include "the District of Columbia and Puerto Rico, except for the purpose of defining who may be a debtor under chapter 9 of this title."
So in conclusion:
1. No state can become a debtor under the Bankruptcy Code. Only a municipality can become a debtor under chapter 9, and only when authorized by its state. (As a side note, I have no idea which state would be responsible for authorizing something like the Port Authority of New York and New Jersey to file. But hopefully that eventuality will never arise.)
2. The states are allowed, but not required, to authorize their municipalities to file for chapter 9 protection. (The last time I checked, about half the states had statutes authorizing their municipalities to file cases under chapter 9.) However, Puerto Rico and D.C. are not permitted to do so. Their municipalities are flatly ineligible for protection under chapter 9 of the Bankruptcy Code, as it is currently drafted.
3. There is some conceivable wiggle room here. A municipality in Puerto Rico cannot file a chapter 9 petition. But a corporation in Puerto Rico can file a chapter 11 petition. Often municipalities are registered as corporations. That doesn't mean that they are corporations for Bankruptcy Code purposes, but at least the argument can be made. This is what happened in the case of the Las Vegas Monorail. Creditors claimed it was a municipality and tried to get the case dismissed (Nevada had not authorized it to file a petition), but the court ruled that it was a corporation entitled to be a debtor under chapter 11. (A corporation does not need state authorization to file a petition.)
Puerto Rico tried drafting its own insolvency statute, but the First Circuit Court of Appeals struck it down, holding that it was preempted by the Bankruptcy Code. Here is a link (PDF) to the decision, but I don't know how long that link will work. The concurrence is very interesting.
posted by sudo intellectual at 7:05 PM on August 3, 2015 [9 favorites]
Differences between Puerto Rico and Greece, 1, 2, 3
posted by triggerfinger at 7:05 PM on August 3, 2015 [1 favorite]
posted by triggerfinger at 7:05 PM on August 3, 2015 [1 favorite]
I remember when people were pushing these bonds, and they were explicitly saying that they were safe investments because it was inconceivable that a city or territory would be allowed to default.
Ha. That word didn't mean what they thought it did.
posted by Joe in Australia at 7:07 PM on August 3, 2015 [3 favorites]
Ha. That word didn't mean what they thought it did.
posted by Joe in Australia at 7:07 PM on August 3, 2015 [3 favorites]
Thank you, triggerfinger, I appreciate further reading on this. I probably should have avoided the comparison in the title, but then again you wouldn't have posted those if I had.
posted by Caduceus at 7:22 PM on August 3, 2015
posted by Caduceus at 7:22 PM on August 3, 2015
Living in Puerto Rico, all I can say is, if conservatives let Puerto Rico default, there is going to be a flood of voters coming to such states as Florida who are going to kick conservative ass.
posted by dances_with_sneetches at 5:59 PM on August 3
Because ordinary voters elsewhere, beyond some Puerto Ricans, would care strongly about this...
posted by knoyers at 7:22 PM on August 3, 2015
sudo intellectual: "Eligibility to be a debtor under the U.S. Bankruptcy Code is governed by 11 U.S.C. § 109 ("Who may be a debtor").
§ 109(c) provides that an entity can be a debtor under chapter 9 only if it is a municipality. (There are additional requirements—the state has to authorize the municipality to file, the municipality must be insolvent, the municipality must negotiate with its creditors, etc.) There is no other chapter of the Bankruptcy Code that would permit a governmental unit to become a debtor.
§ 101(40) defines "municipality" to mean "political subdivision or public agency or instrumentality of a State."
§ 101(52) defines "State" to include "the District of Columbia and Puerto Rico, except for the purpose of defining who may be a debtor under chapter 9 of this title."
So in conclusion:
1. No state can become a debtor under the Bankruptcy Code. Only a municipality can become a debtor under chapter 9, and only when authorized by its state. (As a side note, I have no idea which state would be responsible for authorizing something like the Port Authority of New York and New Jersey to file. But hopefully that eventuality will never arise.)
2. The states are allowed, but not required, to authorize their municipalities to file for chapter 9 protection. (The last time I checked, about half the states had statutes authorizing their municipalities to file cases under chapter 9.) However, Puerto Rico and D.C. are not permitted to do so. Their municipalities are flatly ineligible for protection under chapter 9 of the Bankruptcy Code, as it is currently drafted.
3. There is some conceivable wiggle room here. A municipality in Puerto Rico cannot file a chapter 9 petition. But a corporation in Puerto Rico can file a chapter 11 petition. Often municipalities are registered as corporations. That doesn't mean that they are corporations for Bankruptcy Code purposes, but at least the argument can be made. This is what happened in the case of the Las Vegas Monorail. Creditors claimed it was a municipality and tried to get the case dismissed (Nevada had not authorized it to file a petition), but the court ruled that it was a corporation entitled to be a debtor under chapter 11. (A corporation does not need state authorization to file a petition.)
Puerto Rico tried drafting its own insolvency statute, but the First Circuit Court of Appeals struck it down, holding that it was preempted by the Bankruptcy Code. Here is a link (PDF) to the decision, but I don't know how long that link will work. The concurrence is very interesting."
I have a backup in my Dropbox. It is still uploading as 21:31 CST 8/3/15. Should be done inside of three hours from now. Sorry, my upload speed sucks.
posted by Samizdata at 7:32 PM on August 3, 2015 [1 favorite]
§ 109(c) provides that an entity can be a debtor under chapter 9 only if it is a municipality. (There are additional requirements—the state has to authorize the municipality to file, the municipality must be insolvent, the municipality must negotiate with its creditors, etc.) There is no other chapter of the Bankruptcy Code that would permit a governmental unit to become a debtor.
§ 101(40) defines "municipality" to mean "political subdivision or public agency or instrumentality of a State."
§ 101(52) defines "State" to include "the District of Columbia and Puerto Rico, except for the purpose of defining who may be a debtor under chapter 9 of this title."
So in conclusion:
1. No state can become a debtor under the Bankruptcy Code. Only a municipality can become a debtor under chapter 9, and only when authorized by its state. (As a side note, I have no idea which state would be responsible for authorizing something like the Port Authority of New York and New Jersey to file. But hopefully that eventuality will never arise.)
2. The states are allowed, but not required, to authorize their municipalities to file for chapter 9 protection. (The last time I checked, about half the states had statutes authorizing their municipalities to file cases under chapter 9.) However, Puerto Rico and D.C. are not permitted to do so. Their municipalities are flatly ineligible for protection under chapter 9 of the Bankruptcy Code, as it is currently drafted.
3. There is some conceivable wiggle room here. A municipality in Puerto Rico cannot file a chapter 9 petition. But a corporation in Puerto Rico can file a chapter 11 petition. Often municipalities are registered as corporations. That doesn't mean that they are corporations for Bankruptcy Code purposes, but at least the argument can be made. This is what happened in the case of the Las Vegas Monorail. Creditors claimed it was a municipality and tried to get the case dismissed (Nevada had not authorized it to file a petition), but the court ruled that it was a corporation entitled to be a debtor under chapter 11. (A corporation does not need state authorization to file a petition.)
Puerto Rico tried drafting its own insolvency statute, but the First Circuit Court of Appeals struck it down, holding that it was preempted by the Bankruptcy Code. Here is a link (PDF) to the decision, but I don't know how long that link will work. The concurrence is very interesting."
I have a backup in my Dropbox. It is still uploading as 21:31 CST 8/3/15. Should be done inside of three hours from now. Sorry, my upload speed sucks.
posted by Samizdata at 7:32 PM on August 3, 2015 [1 favorite]
Because ordinary voters elsewhere, beyond some Puerto Ricans, would care strongly about this...
Puerto Ricans are US citizens, can move to the States, and can vote from their new residences once they get there.
posted by ROU_Xenophobe at 9:31 PM on August 3, 2015
Puerto Ricans are US citizens, can move to the States, and can vote from their new residences once they get there.
posted by ROU_Xenophobe at 9:31 PM on August 3, 2015
Unless voter suppression occurs, which Florida has been accused of before. It does not need to be complicated, just slow.
posted by jadepearl at 5:05 AM on August 4, 2015
posted by jadepearl at 5:05 AM on August 4, 2015
Puerto Rico v Greece: a study in contrast - "Daniel Gros has the much better handle on the Puerto Rico-Greece comparison than Krugman. Gros's paper on this - which concludes that it's the US scheme for restructuring banks that limits the damage of (sub-)sovereign debt crises in the US, rather than the supposed fiscal insurance - remains essential reading. For those who want to understand the Puerto Rican situation specifically, so do my colleague Robin Wigglesworth's explainer (from which the chart above is drawn) and the official report by Anne Krueger on the island's economic situation."
posted by kliuless at 10:43 AM on August 4, 2015
posted by kliuless at 10:43 AM on August 4, 2015
Hey, remember when we said above that this would be used as an excuse to pirate Greece's public assets for pennies on the dollar?
Well, we weren't cynical enough. (That page contains links to the apparent "asset development plan" docs.)
Well, we weren't cynical enough. (That page contains links to the apparent "asset development plan" docs.)
"So the privatisations aren’t to do with helping Greece. The beneficiaries are corporations from around the world, though eyebrows are particularly being raised at the number of European companies – from German airport operators and phone companies to French railways – who are getting their hands on Greece’s economy. Not to mention the European investment banks and legal firms who are making a fast buck along the way. The self-interest of European governments in forcing these policies on Greece leaves a particularly unpleasant flavour."posted by introp at 3:18 PM on August 22, 2015 [1 favorite]
« Older Dying for their Art | We go down to the indie disco every Thursday night Newer »
This thread has been archived and is closed to new comments
posted by dances_with_sneetches at 5:59 PM on August 3, 2015 [3 favorites]