Why was Puerto Rico allowed to default while Greece was not? Just follow the money: those hit were the poor, while U.S. hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. once more.
On August 1, Puerto Rico defaulted on part of its enormous US$72 billion debt, paying back only US$628,000 on a relatively small US$58 million loan that was due at the start of the month. The default, which marks the most serious credit event in U.S. public bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. markets since the city of Detroit filed for bankruptcy in 2013, has led many to draw obvious comparisons to Greece – and understandably so.
Like Greece, Puerto Rico has been mired in a protracted recession that has seen unemployment rise, living standards fall and countless people leave their homeland in search of better life opportunities in the creditor states. Like Greece, Puerto Rico is buckling under an unsustainable debt load that its leaders claim “cannot be repaid.” And like Greece, Puerto Rico is effectively a dependent ward of the larger union of which it is a part: Greece of the Eurozone and Puerto Rico of the United States.
But for all these obvious similarities, there is one puzzling difference: while Puerto Rico was allowed to default on its debts without drawing much ire – or interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. – from the U.S. government, Greece has not been able to do the same. Why was Puerto Rico allowed to default? The answer is simple: follow the rules, then follow money – and you will see.
When it comes to the rules, part of the answer surely lies in the peculiar institutional arrangement Puerto Rico finds itself in. As a commonwealth – or a de facto colony – of the United States, Puerto Rico and its public corporations can neither turn to the IMF
International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.
When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.
As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).
The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
http://imf.org for an international bailout, as nominally “sovereign” nations like Greece, Portugal and Ireland have done in recent years, nor file for Chapter 9 bankruptcy in the US, as state municipalities like Detroit, Michigan and Stockton, California have.
The result is to leave the Caribbean island in a sort of legal and financial limbo from which the only possible escape is either a “bailout” from the federal government or a unilateral suspension of payments on the debt. Since the former does not appear to be forthcoming (at least not for now), the latter has become all but inevitable. Experts seem to believe that the missed payment of August 1 was only just the beginning.
When it comes to the money, however, we encounter the real reason why Puerto Rico’s creditors have been so reluctant to intervene: because the commonwealth’s government basically just defaulted on its own people. The non-payment of August 1 was strictly limited to bonds held by the Public Finance Corporation, in which almost 900,000 poor and mostly rural Puerto Ricans – powerless pensioners and small savers – have invested their life savings through their local not-for-profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. credit unions.
As one of them, a mathematics professor, just told The New York Times: “they told me this was safe, that the legal protections were strong. They told me this was the best place to put my money, and I trusted them.”
But the bonds were not safe and those who sold them were not to be trusted. What most Puerto Rican savers and pensioners did not know was that their island’s awkward legal status under U.S. law had allowed the big players on Wall Street to effectively turn their island into a casino. Because Puerto Rico’s administration was in dire need of external financing, and because its public bonds are governed by a so-called “triple-exemption rule” that makes interest paid on them free of all city, state and federal taxes in the mainland United States, the banks saw a potential boom market.
As Eric Draitser wrote for teleSUR on the day before the default, “Barclays, Morgan Stanley, Goldman Sachs, JP Morgan, Bank of America-Merrill Lynch, and many others rushed to underwrite massive loans in the form of bond purchases in order to then turn around and sell those bonds to hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. and other investors in the U.S. and around the world, thereby raking in tremendous profits on the underwriting fees. Essentially, Wall Street banks came in with enormous capital, then transferred the risk on to other speculators, while making handsome profits as middlemen.”
Hedge fund managers, meanwhile, were getting drunk on the high yields, zero-taxes, steep discounts and strong constitutional protections that these Puerto Rican bonds seemed to offer. As late as 2014, Jeffrey Gundlach of DoubleLine Capital referred to investing in Puerto Rico as his “best idea,” while John Paulson – who gained notoriety for his speculative bets in Greece in recent years – even praised the economically moribund U.S. debt colony as “the Singapore of the Caribbean.”
Now, what has largely gone unmentioned since the default is that Puerto Rico’s fiscally strapped government did, on the same day, repay most of its $500 million in obligations to the big hedge funds and other institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. . The default, in other words, was a strategic decision by the Puerto Rican government – presumably undertaken under the pressure of the hedge funds themselves – to shift all losses onto the local population.
As a journalist for The Independent summarized the situation: “Some have called the US$58 million default a calculated effort, as Puerto Rico paid ‘the big guys’ with the legal power to sue, while it shortchanged the low-risk creditors in its own backyard.” Or, as James Henry, an investment scholar at Columbia University, put it:
“They have selectively defaulted. They are defaulting on publicly-traded stuff and trying to negotiate private agreements with hedge funds. Hedge funds have a lot of clout in governments and are likely going behind the scenes to help influence who gets paid back. If Puerto Rico ever wants to borrow again they have to pay back these guys. That’s the vulture approach.”
Meanwhile, even though it cannot apply for an IMF bailout, the Puerto Rican government has already called in the help of three former IMF officials, including the Fund’s former deputy chief economist Anne Krueger, for advise on how to proceed. In a report published at the end of June, the ex-IMF advisors called on the government to fire thousands of teachers, close schools, increase property taxes, suspend the minimum wage and slash the amount of paid holidays in half.
Perhaps, then, Puerto Rico’s payment record is not so different from Greece’s after all: both have reneged on obligations to their own citizens in order to please their colonial masters. Default is fine, it seems, as long as Wall Street and Frankfurt are repaid.
Jerome Roos is a PhD researcher in International Political Economy at the European University Institute, and founding editor of ROAR Magazine. Follow him on Twitter at @JeromeRoos.
15 December 2015, by Jerome Roos
3 July 2015, by Jerome Roos