Wednesday, July 1, 2015
Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable’
Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable’
Puerto
Rico’s governor, saying he needs to pull the island out of a “death
spiral,” has concluded that the commonwealth cannot pay its roughly $72
billion in debts, an admission that will probably have wide-reaching
financial repercussions.
The
governor, Alejandro García Padilla, and senior members of his staff
said in an interview last week that they would probably seek significant
concessions from as many as all of the island’s creditors, which could
include deferring some debt payments for as long as five years or
extending the timetable for repayment.
“The
debt is not payable,” Mr. García Padilla said. “There is no other
option. I would love to have an easier option. This is not politics,
this is math.”
It is a startling admission from the governor of an island of 3.6 million people, which has piled on more municipal bond debt per capita than any American state.
A broad restructuring by Puerto Rico sets the stage for an unprecedented test of the United States municipal bond market, which cities and states rely on to pay for their most basic needs, like road construction and public hospitals.
That market has already been shaken by municipal bankruptcies in Detroit; Stockton, Calif.; and elsewhere, which undercut assumptions that local governments in the United States would always pay back their debt.
Puerto
Rico’s bonds have a face value roughly eight times that of Detroit’s
bonds. Its call for debt relief on such a vast scale could raise
borrowing costs for other local governments as investors become more
wary of lending.
Perhaps
more important, much of Puerto Rico’s debt is widely held by individual
investors on the United States mainland, in mutual funds or other
investment accounts, and they may not be aware of it.
Puerto
Rico, as a commonwealth, does not have the option of bankruptcy. A
default on its debts would most likely leave the island, its creditors
and its residents in a legal and financial limbo that, like the debt
crisis in Greece, could take years to sort out.
Still,
Mr. García Padilla said that his government could not continue to
borrow money to address budget deficits while asking its residents,
already struggling with high rates of poverty and crime, to shoulder
most of the burden through tax increases and pension cuts.
He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.
“If
they don’t come to the table, it will be bad for them,” said Mr. García
Padilla, who plans to speak about the fiscal crisis in a televised
address to Puerto Rico residents on Monday evening. “What will happen is
that our economy will get into a worse situation and we’ll have less
money to pay them. They will be shooting themselves in the foot.”
With
some creditors, the restructuring process is already underway. Late
last week, Puerto Rico officials and creditors of the island’s electric
power authority were close to a deal that would avoid a default on a
$416 million payment due on Wednesday.
With
other payment deadlines looming, Mr. García Padilla and his staff said
they would begin looking for possible concessions on all forms of
government debt.
The
central government must set aside about $93 million each month to pay
its general obligation bonds — a crucial action in Puerto Rico because
its constitution requires such bonds to be paid before any other
expense. No American state has restructured its general obligation debt
in living memory.
The
government’s Public Finance Corporation, which has issued bonds to
finance budget deficits in the past, owes $94 million on July 15. The
Government Development Bank — the commonwealth’s fiscal agent — must
repay $140 million of bond principal by Aug. 1.
“My
administration is doing everything not to default,” Mr. García Padilla
said. “But we have to make the economy grow,” he added. “If not, we will
be in a death spiral.”
A
proposed debt exchange, where creditors would replace their current
debt with new bonds with terms more favorable to Puerto Rico, signals a
significant shift for Mr. García Padilla, a member of the Popular
Democratic Party, who was elected in 2012. His party is aligned with the
Democrats on the mainland and favors maintaining the island’s legal
status as a commonwealth.
He
said that when he took office, he tried to balance the fiscal situation
through austerity measures and fresh borrowing. But he saw that the
island was caught in a vicious circle where it borrowed to balance the
budget, raised the debt and had an even bigger budget deficit the next
year.
Residents
began leaving for the mainland in droves, and Puerto Rico’s credit was
downgraded to junk, making borrowing extremely expensive.
Only
a few months ago, the administration was considering borrowing as much
as an additional $2.9 billion, which would be paid for by a fuel tax.
But
recently, Mr. García Padilla’s team has been laying the groundwork for
more drastic action. The governor commissioned a study of the financial
situation by former officials at the International Monetary Fund and the
World Bank. Concluding that the debt load is unsustainable, the report
suggests a bond exchange, with the new bonds carrying “a longer/lower
debt service profile,” according to a confidential copy reviewed by The
New York Times. The García Padilla administration made the report public on Monday.
“There
is no U.S. precedent for anything of this scale or scope,” according to
the report, one of whose writers was Anne O. Krueger, a former chief
economist at the World Bank and currently a research professor at the
School of Advanced International Studies at Johns Hopkins University.
The
“Krueger Report,” as it is being called, also seems aimed at the Obama
administration and Congress, both of which have taken a largely
hands-off approach to Puerto Rico’s fiscal problems. United States
Treasury officials, however, have been advising the island’s government
in recent months amid the worsening fiscal situation.
In
June, Puerto Rico hired Steven W. Rhodes, the retired federal judge who
oversaw Detroit’s bankruptcy case, as an adviser. The government is
also consulting with a group of bankers from Citigroup who advised
Detroit on a $1.5 billion debt exchange with certain creditors.
In
Washington, the García Padilla administration has been pushing for a
bill that would allow the island’s public corporations, like its
electrical power authority and water agency, to declare bankruptcy. Of
Puerto Rico’s $72 billion in bonds, roughly $25 billion were issued by
the public corporations.
Some
officials and advisers say Congress needs to go further and permit
Puerto Rico’s central government to file for bankruptcy — or risk chaos.
“There
are way too many creditors and way too many kinds of debt,” Mr. Rhodes
said in an interview. “They need Chapter 9 for the whole commonwealth.”
Hedge
funds holding billions of dollars of the island’s bonds at steep
discounts are frustrated that the government has not seemed willing to
reach a deal to borrow more money from them.
“We
want to be a part of the solution to the commonwealth’s fiscal
challenges,” a group of investment firms, including Centerbridge
Partners and Monarch Alternative Capital, wrote in a letter last week.
An
aide to the governor said the hedge funds’ debt proposal was too
onerous. And the deal would only postpone Puerto Rico’s inevitable
reckoning.
“It will kick the can,” Mr. García Padilla said. “I am not kicking the can.”
California cities show biggest water savings yet in drought
California cities show biggest water savings yet in drought
Regulators hope the savings will last through summer as California communities are under order to cut water use by 25 percent compared to 2013 levels. Gov. Jerry Brown announced his mandatory conservation order in April.
Felicia Marcus, chairwoman of the State Water Resources Control Board enforcing Brown's order, said the results show it's possible to meet steep conservation targets.
"It's gratifying that far more communities are stepping up and we want to see this much more through the summer," Marcus said. "It ends up putting off the need for much harsher rationing which has greater impacts on people and the economy."
The May water savings were the best showing since the state started tracking conservation last year. It followed several months of tepid conservation, 13.5 percent in April and 4 percent in March.
The data is self-reported by California water departments and includes residential and business consumption. All regions of the state showed improvement.
The southern coast, which includes Los Angeles and San Diego, conserved 25 percent in May after months of tepid savings. Sacramento and its surrounding suburbs were the state's top performer, cutting water use nearly 40 percent.
The conservation may have been skewed by rain in parts of the state, which reduces the need to water lawns. Regulators have been encouraging Californians to let their lawns go dry this summer as the easiest way to save large amounts of water and maintain local supplies if the drought continues.
Bank closures taking their toll on businesses across Greece
Bank closures taking their toll on businesses across Greece
Consumption apparently down 70%, tourism drying up and companies face
struggle to pay for wholesale food ahead of 5 July referendum
Giorgos Kourasis knows exactly how many people have walked through
the door of his tavern since Monday, because he has had nothing to do
but wait and count.
“The number,” he says in full knowledge of the ironic punch he is about to pull, “is zero. Absolutely no one has come and sat at a table for the first time in the 80 years that we’ve had our family business. “
Less than 72 hours have elapsed since banks were closed and capital controls imposed on Greece, but the effect has been devastating.
An economy, already labouring under an unprecedented liquidity squeeze, has come to a juddering halt.
Shops have closed, factories have stopped operating and firms have told employees to take enforced leave until the country holds a referendum on July 5 over the terms of further financial assistance from international creditors. Many larger companies have refused to pay staff altogether.
“Consumption has dropped by 70%,” said Vassilis Korkidis, who heads the National Confederation of Hellenic commerce. “No one trusts anyone anymore, so no transactions are taking place between wholesale and retail,” he said.
The confederation, which represents some 280,000 small and medium-sized businesses, has been badly hit by capital controls. More than half of Greece’s food and raw materials are imported, but without a functioning banking system there was no way to wire money abroad and pay for supplies, said Korkidis.
“Multinationals can, but local companies can’t,” he sighed. “Shortages are manageable this week because traders have stock, but next week that won’t be the case. We are experiencing things we never thought we’d see.”
The cap on cash withdrawals of €60 a day has attributed to the precipitous drop in consumption. And amid fears of it only being a matter of time before banks completely run out of notes and coins , there is mounting speculation that the limit may be reduced to a paltry €20.
“People are very worried about spending anything because they don’t know what they will wake up to tomorrow,” said Kourasis, who will have to lay off staff to make ends meet. “We’re a family business so we can afford to stay open, but I’ve heard of dozens of stores deciding not to open because they just can’t afford running costs.”
The signs of mega economic gridlock were evident all over Athens on Wednesday – and not only in the form of closed shops, empty restaurants and queues outside cash dispensers. Ferry boats sailing from the city’s port of Pireaus were bereft of passengers. Public transport was noticeably thinner, the result of fuel reserves running low, while supermarkets were showing signs of panic buying, with food staples at an all-time low.
The newspaper Ta Nea – apologising for appearing much thinner itself – declared “the country is diminishing.”
“The newspaper that you hold in your hands is only 32 pages because there are only enough reserves of paper left for a few days,” it wrote in an editorial. “And there is no possibility to buy new amounts because of the enforced closure of banks.”
The new downturn came on top of official data showing Greek manufacturing activity shrank for the 10th month in a row during June. The last three months were the worst quarter for manufacturing for two years.
At what is almost the height of the tourist season, hotels are also feeling the heat with a reported 40% drop in airline and tour operator bookings.
Athens’ failure to meet a debt repayment of €1.6bn to the IMF on Tuesday has resulted in mass cancellations of bank transactions by US travel companies.
“American tour operators were ready to make wire transfers,” said Ioannis Retzos, president of the Panhellenic Federation of Hoteliers. “But they couldn’t when US authorities warned them that money transactions to Greek banks would be impounded.”
If voters reject proposed reforms as the radical left prime minister Alexis Tsipras has urged them to do, telling the nation on Wednesday that it will strengthen Athens’ hand in negotiations with the EU and IMF, there are fears that plans to open banks next Tuesday will be revoked.
Reserves at the Bank of Greece, estimated at €1.6bn last Friday, are being depleted fast. “Even if there was an agreement today, it would take two to three weeks for banks to get back on their feet,” said Korkidis.
“And cash is running out very quickly. By Monday there is a very strong chance that ATMs won’t be dispensing any at all.”
“The number,” he says in full knowledge of the ironic punch he is about to pull, “is zero. Absolutely no one has come and sat at a table for the first time in the 80 years that we’ve had our family business. “
Less than 72 hours have elapsed since banks were closed and capital controls imposed on Greece, but the effect has been devastating.
An economy, already labouring under an unprecedented liquidity squeeze, has come to a juddering halt.
Shops have closed, factories have stopped operating and firms have told employees to take enforced leave until the country holds a referendum on July 5 over the terms of further financial assistance from international creditors. Many larger companies have refused to pay staff altogether.
“Consumption has dropped by 70%,” said Vassilis Korkidis, who heads the National Confederation of Hellenic commerce. “No one trusts anyone anymore, so no transactions are taking place between wholesale and retail,” he said.
The confederation, which represents some 280,000 small and medium-sized businesses, has been badly hit by capital controls. More than half of Greece’s food and raw materials are imported, but without a functioning banking system there was no way to wire money abroad and pay for supplies, said Korkidis.
“Multinationals can, but local companies can’t,” he sighed. “Shortages are manageable this week because traders have stock, but next week that won’t be the case. We are experiencing things we never thought we’d see.”
The cap on cash withdrawals of €60 a day has attributed to the precipitous drop in consumption. And amid fears of it only being a matter of time before banks completely run out of notes and coins , there is mounting speculation that the limit may be reduced to a paltry €20.
“People are very worried about spending anything because they don’t know what they will wake up to tomorrow,” said Kourasis, who will have to lay off staff to make ends meet. “We’re a family business so we can afford to stay open, but I’ve heard of dozens of stores deciding not to open because they just can’t afford running costs.”
The signs of mega economic gridlock were evident all over Athens on Wednesday – and not only in the form of closed shops, empty restaurants and queues outside cash dispensers. Ferry boats sailing from the city’s port of Pireaus were bereft of passengers. Public transport was noticeably thinner, the result of fuel reserves running low, while supermarkets were showing signs of panic buying, with food staples at an all-time low.
The newspaper Ta Nea – apologising for appearing much thinner itself – declared “the country is diminishing.”
“The newspaper that you hold in your hands is only 32 pages because there are only enough reserves of paper left for a few days,” it wrote in an editorial. “And there is no possibility to buy new amounts because of the enforced closure of banks.”
The new downturn came on top of official data showing Greek manufacturing activity shrank for the 10th month in a row during June. The last three months were the worst quarter for manufacturing for two years.
At what is almost the height of the tourist season, hotels are also feeling the heat with a reported 40% drop in airline and tour operator bookings.
Athens’ failure to meet a debt repayment of €1.6bn to the IMF on Tuesday has resulted in mass cancellations of bank transactions by US travel companies.
“American tour operators were ready to make wire transfers,” said Ioannis Retzos, president of the Panhellenic Federation of Hoteliers. “But they couldn’t when US authorities warned them that money transactions to Greek banks would be impounded.”
If voters reject proposed reforms as the radical left prime minister Alexis Tsipras has urged them to do, telling the nation on Wednesday that it will strengthen Athens’ hand in negotiations with the EU and IMF, there are fears that plans to open banks next Tuesday will be revoked.
Reserves at the Bank of Greece, estimated at €1.6bn last Friday, are being depleted fast. “Even if there was an agreement today, it would take two to three weeks for banks to get back on their feet,” said Korkidis.
“And cash is running out very quickly. By Monday there is a very strong chance that ATMs won’t be dispensing any at all.”
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