Posted on 07/05/2015 3:52:11 PM PDT by SeekAndFind
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.
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.
It would be hard to understate just how severe the debt crisis in Puerto Rico has become. Former IMF economist Anne Krueger has gone so far as to say that it is “really dire”…
“The situation is dire, and I mean really dire,” said former IMF economist Anne Krueger, co-author of the report commissioned by the U.S. territory, which recommended debt restructuring, tax hikes and spending cuts. “The needed measures may face political resistance but failure to address the issues would affect even more the people of Puerto Rico.”
So who is going to get left holding the bag?
As I mentioned at the top of this article, major U.S. financial institutions are very heavily exposed. Income from Puerto Rican bonds is exempt from state and federal taxation, and so that made them very attractive to many U.S. investors. According to USA Today, there are 180 mutual funds that have “at least 5% of their portfolios in Puerto Rican bonds”…
The inability of the U.S. territory to repay its debt, combined with the financial crisis in Greece, would have far-reaching implications for financial markets and unsuspecting American investors. Morningstar, an investment research firm based in Chicago, estimated in 2013 that 180 mutual funds in the United States and elsewhere have at least 5% of their portfolios in Puerto Rican bonds.
It is important to keep in mind that many of these financial institutions are very highly leveraged. So just a “couple of percentage points” could mean the different between life and death for some of these firms.
And unlike what is happening with Greece, the private financial institutions that hold Puerto Rican bonds are not likely to be very eager to “negotiate”. In fact, the largest holder of Puerto Rican debt has already stated that it is very much against any kind of restructuring…
U.S. fund manager OppenheimerFunds, the largest holder of Puerto Rico debt among U.S. municipal bond funds, warned the island it stands ready to defend the terms of bonds it holds, a day after the governor said he wanted to restructure debt and postpone bond payments.
What Oppenheimer is essentially saying is that it does not plan to give Puerto Rico any slack at all. Here is more from the article that I just quoted above…
OppenheimerFunds, with about $4.5 billion exposure to Puerto Rico according to Morningstar, said it believed the island could repay bondholders while providing essential services to citizens and growing the economy. It said it stood ready “to defend the previously agreed to terms in each and every bond indenture.”
“We are disheartened that Governor Padilla, in a public forum, has called for negotiations with other creditors, representing and including the millions of individual Americans that hold Puerto Rico municipal bonds,” a spokesman for Oppenheimer said in a statement.
But Puerto Rico simply does not have the money to meet all of their debt obligations.
So somebody is not going to get paid at some point.
When that happens, those that insure Puerto Rican bonds are also going to take tremendous losses. The following comes from a recent piece by Stephen Flood…
Now, bondholders are at risk as are the funds which hold Puerto Rican bonds and, more importantly, those who insure them in the derivatives market.
Dave Kranzler, from Investment Research Dynamics has warned that there are signs that the Puerto Rico situation may not remain a local crisis for much longer.
He points out that share prices of MBIA, the bond insurers, have been plummeting. MBIA are valued at $3.9 billion whereas their exposure to Puerto Rican debt is around $4.5 billion. Kranzler reckons their exposure could even be multiples of that figure. A default could wipe them out.
He also points out that the firm’s largest shareholders are Warburg Pincus, the firm to which Timothy Geithner went after his stint as Treasury Secretary, when he helped paper over the chasms opening up in the financial system.
Did you notice the word “derivatives” in that quote?
Hmmm – who has been writing endless articles warning about the danger of derivatives for years?
Who has been warning that “this gigantic time bomb is going to go off and absolutely cripple the entire global financial system“?
When Puerto Rico defaults, bond insurers are going to be expected to step up and make huge debt service payments to investors.
But this just might bankrupt some of these big bond insurers. In fact, we have already started to see the stock prices of some of these bond insurers begin to plummet. The following comes from the Wall Street Journal…
Bond insurers MBIA Inc. and Ambac Financial Group Inc. are down again Tuesday as concerns over Puerto Rico’s ability to repay its debt multiply.
Investors fear that both firms face the potential for steep losses on their promises to backstop billions of Puerto Rico’s $72 billion of debt.
MBIA’s stock closed down 23% Monday, and fell more than 10% before rebounding Tuesday. By late afternoon, the stock was down 6%. Ambac’s stock fell 12% Monday and was off 14% Tuesday.
Of course Puerto Rico is just the tip of the iceberg of the coming debt crisis in the western hemisphere, just like Greece is just the tip of the iceberg of the coming debt crisis in Europe.
So stay tuned, because the second half of 2015 has now begun, and the remainder of this calendar year promises to be extremely “interesting”.
Guam is in the same boat as Puerto Rico.
The government has systemic corruption and thousands of people simply collect welfare and do not work.
Eddy Calvo has tried to cut back on government expenses but too many people want their EBT card here and we have big naval base and big Air Force base to supplement the local monies.
Puerto Rico has less excuse there are many more people, the island is larger and has more resources and it is closer to trade routes. Guam is so isolated it will never really be self sufficient in the modern world but we could and shouold do better than we do
Even with a perfect agricultural climate and plenty of water Puerto Rico can’t even grow its own food. The majority of their food has to be imported - about 80%.
If they can’t even grow their own food why would we want them as a state? That alone should be enough without even considering their crime rate. We don’t need anymore welfare leeches.
Ping.
Trying to catch-up Ping.
Check out thi$ one:
Why The Puerto Rico Debt Crisis Is Such A Huge Threat To The U.S. Financial System
Where is that illusive US Treasury?
Can you say Puerto Rico??
http://ppjg.me/2010/04/28/where-is-that-ellusive-us-treasury-can-you-say-puerto-rico/
Note:
This article originally appeared 4-28-10. In the brief time that has passed,27 CFR 250.11, cited as the legal definition of the Treasury Secretary has *somehow* -mysteriously and without explanation- been wiped from the Code of Federal Regulations.
It has also been wiped from all legal websites carrying copies of CFR and USC. 250.11 was titled “definitions” and described the Secretary of the Treasury as one in Puerto Rico, and the IRS as an enforcement arm of the IMF>>>>>>>
See also:
Treasury Secretary does not work for the United States
THERE IS NO US TREASURY!
The US Treasury Office, the enforcement agency of the IMF/World Bank,
-is actually located in Puerto Rico- and is not a US agency.
http://ppjg.me/2009/03/24/treasury-secretary-does-not-work-for-the-united-states/
.
Thanks for the injection of clarity.
L
The Creature from Jekyll Island : A Second Look at the Federal Reserve
Debates in the House of Representatives on the First Report on Public Credit 9–18 February 1790
James Jackson (Ga.)
But it is doubted with me whether a permanent funded debt is beneficial or not to any country.
The same effect must be produced that has taken place in other nations; it must either bring on a national bankruptcy or annihilate her existence as an independent empire. Hence I contend, sir, that a funding system, in this country, will be highly dangerous to the welfare of the republic; it may, for a moment, raise our credit and increase the circulation, by multiplying a new species of currency; but it must, in times afterward, settle upon our posterity a burthen which they can neither bear nor relieve themselves from. It will establish a precedent in America that may, and in all probability will, be pursued by the sovereign authority until it brings upon us that ruin which it has never failed to bring, or is inevitably bringing, upon all the nations of the earth who have had the temerity to make the experiment.
http://oll.libertyfund.org/titles/875
It was renumbered; from the above link:
“... 27 CFR 26.11 (formerly 27 CFR 250.11)...”
Here is the entire renumbered 27 CFR 250.11,
https://www.law.cornell.edu/cfr/text/27/26.11
Mentions a bank in New York
It was renumbered; from the above link:
“... 27 CFR 26.11 (formerly 27 CFR 250.11)...
The whole thing:
https://www.law.cornell.edu/cfr/text/27/26.11
Mentions a bank in New York .
Thanks. Recalled reading about the IRS being in Puerto Rico, not the US Treasury.
From your link - interesting that there are conflicts in the description of terms.
https://www.law.cornell.edu/cfr/text/27/26.11
“Commercial bank”. A bank, whether or not a member of the Federal Reserve System, which has access to the Federal Reserve Communications System (FRCS) or Fedwire. The “FRCS” or “Fedwire” is a communications network that allows Federal Reserve System member banks to effect a transfer of funds for their customers (or other commercial banks) to the Treasury Account at the Federal Reserve Bank of New York.
“Electronic fund transfer or EFT”. Any transfer of funds effected by a proprietor’s commercial bank, either directly or through a correspondent banking relationship, via the Federal Reserve Communications System (FRCS) or Fedwire to the Treasury Account at the Federal Reserve Bank of New York.
“Revenue Agent”. Any duly authorized Commonwealth Internal Revenue Agent of the Department of the Treasury of Puerto Rico.
“Treasury Account”. The Department of the Treasury’s General Account at the Federal Reserve Bank of New York.
Whenifhow,
That document deals with liqour etc coming in thru the Virgin Islands and Puerto Rico.
So they mention the PR treasury as well as the account of the US Treasury in New York.
Another thought, what does it say on the fed tax refund checks that people get?
Not many get an actual check, but when it does happen, it seems like it says US Treasury with no address (city or state)
From the other link - see this - hasn’t the DOJ been representing the IRS in the scandal?
#5
Does the U.S. Department of Justice have power of attorney to represent the IRS in federal court?
Answer: No. Although the U.S. Department of Justice (“DOJ”) does have power of attorney to represent federal agencies before federal courts, the IRS is not an “agency” as that term is legally defined in the Freedom of Information Act or in the Administrative Procedures Act. The governments of all federal Territories are expressly excluded from the definition of federal “agency” by Act of Congress. See 5 U.S.C. 551(1)(C).
Since IRS is domiciled in Puerto Rico (RICO?), it is thereby excluded from the definition of federal agencies which can be represented by the DOJ.
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