This article was published by The McAlvany Intelligence Advisor on Friday, July 1, 2016:
Investors saw the market values of their Puerto Rican bonds soar with news that Congress passed the “Puerto Rico Oversight, Management and Economic Stability Act” (PROMESA). They had a right to be happy: prior to the news their long bonds were trading at about 62 cents on the dollar. Afterwards they jumped to 66 cents. Still a paper loss of a third of their initial investment, but better than anticipated.
What’s anticipated is that the new oversight board, populated with politicians (but none from Puerto Rico), will solve all of the island’s problems, get past its recent defaults, and allow new financings to come to market. It won’t matter that the island has already defaulted on $500 million in debt service so far this year, and will default on Friday, July 1 on most of another $2 billion. It won’t matter that its bonds are rated junk. And it certainly won’t matter that nothing will be done to make the country’s economy stronger. What matters is the yield. In a yield-starved economy, thanks to ZIRP, investors see the juicy returns (12 percent on its 2035 bonds), they see triple-tax exemption, and they line up around the block.
The news caused Dick Larkin at Stoever Glass & Co., which brokers junk bonds like those issued by the bankrupt government of Puerto Rico, to become positively giddy: now we can get back to business! He said that the new board will “enable Puerto Rico to be self-sufficient and able to sell bonds in the future for its operation and capital needs.” The fact that those new issues, when they come to market, are likely to be used to retire some old issues and make the interest payments on the rest is of little matter. Of even less concern is the sense in using bonds to pay for the operating expenses of a government. It doesn’t matter. PR’s new bonds will be scooped up by yield-hungry investors and hedge funds like acorns by a hungry squirrel.
The president himself was also giddy with excitement, claiming that the new law is actually going to do something substantial: “The bill [I’m about to sign into law] is not perfect but it is a critical first step toward economy recovery and restored hope for millions of Americans who call Puerto Rico home.”
Of course it will do nothing of the sort. First, Puerto Ricans are leaving their home island as fast as they can. There are more Puerto Ricans living in Florida than on the island. Second, there will be no economic recovery until and unless the government gets out of the way. With new funding no such thing is likely to happen. Third, the board will implement a new sort of colonialism as properly noted by Senator Bernie Sanders in explaining his “nay” vote. Even liberal Senator Robert Menendez of New Jersey spoke the truth in justifying his “nay” on the bill: it authorizes “an unelected, unchecked and all-powerful control board to determine Puerto Rico’s destiny for a generation or more.”
Third, unions have made sure that implementing even the simplest of measures to restart the island’s moribund economy will not be allowed: no cuts in the minimum wage (to allow business owners to hire people they cannot now afford to pay) and no adjustments to overtime pay rules. For them, the status quo is acceptable.
Fourth, nearly half the country lives in poverty and so raising taxes further is a no-win proposition. But that fact is hardly likely to discourage the new board from demanding further austerity.
What the board is primarily tasked with is getting rid of the potential pesky lawsuits investors and creditors would likely bring as the island defaults on their paper. It also will force them to come to the table and make whatever deal the gang of seven is willing to make them. Clearing away the underbrush is, in other words, the primary task of the board, so that new issues can make their way to market.
It will cost the American taxpayer dearly, despite claims by worthies such as the Senate Majority leader himself to the contrary. Said Mitch: the new bill “won’t cost taxpayers a dime, not a dime.”
No, Mitch, it’ll be more like millions and hundreds of millions. First, there will be legal fees. Oh my, such legal fees! They’re estimated to reach $400 million in just the first five years. Second, the American taxpayer has been bailing out the island for years, paying for its citizens’ coverage under Medicare and Medicaid, estimated to be $350 million a year.
But the biggest bailout was implemented in 2010 using a gimmick – some have called it a “backdoor bailout” – whereby American companies in Puerto Rico paying taxes to the government can take a “foreign tax credit” against their US taxes. That’s estimated to be about $2 billion a year.
The new bill is all about helping investment bankers, municipal bond brokers and hedge fund managers to get past the island’s financial failures so they can resume enticing the government into continuing its spending spree.
Huffington Post: The Senate Is About To Anger Vulture Funds And Help Puerto Rico
The New American: Puerto Rico Bailout Deceptively Called “Restructuring”