
Puerto Rico files for biggest ever U.S. local government bankruptcy - chollida1
http://www.reuters.com/article/us-puertorico-debt-bankruptcy-idUSKBN17Z1UC
======
knob
I have lived all my life in Puerto Rico, and as you can imagine, this issue is
quite controversial. We owe money to the creditors... and what you do with a
debt is to you pay it off. Yet the amount is so staggering, that I wonder if
it's actually possible.

As is typical, decisions by politicians placed us in this situation. Decade
after decade, 4-year term after 4-year term, the government has spent money it
does not have. Be one political party or the other, it is the same thing.

There was a big manifestation this past Monday, where various Unions, groups,
and students did a "Paro Nacional". Truthfully, I don't think they
accomplished anything, other than various idiots vandalizing property they
don't own. We are in deep shit, and it's going to get worse.

Lots of people are leaving the island, which just compounds the problem (less
revenue).

I don't leave because: it's where I was born, where I have lived my entire
life, and it is, honestly, paradise.

Obligatory John Oliver's Puerto Rico segment:
[https://www.youtube.com/watch?v=Tt-
mpuR_QHQ](https://www.youtube.com/watch?v=Tt-mpuR_QHQ)

What will happen? I have no idea. Good to see this in HN.

~~~
vkou
> We owe money to the creditors... and what you do with a debt is to you pay
> it off.

That's not the case. Sometimes, you pay your debt off. Sometimes, you default,
and file for bankruptcy. For lenders, it's the cost of doing business. If they
don't want to deal with the possibility of bankruptcy, they shouldn't lend out
money.

Lenders charge creditors a premium, because of the risk of default. It's as
much on them to be careful about who they lend money to, as it is on the
creditor to be careful about being able to pay off their debts.

~~~
savanaly
That's true in any individual case. But if we make it our social norm that
bankruptcy is nothing to be ashamed of and to be taken lightly, won't it
change the equilibrium for future generations of lenders and borrowers such
that an inefficiently low amount of lending goes on? If everyone has the
expectation that the lenders and borrowers will try their best to live up to
the contract they made in good faith, wouldn't it be a better equlibrium? And
we can work towards such a world bit by bit in how we respond to crises like
the Puerto Rico one.

~~~
ryandrake
> But if we make it our social norm that bankruptcy is nothing to be ashamed
> of and to be taken lightly

I don't know about "taken lightly" but bankruptcy and defaulting on a debt
should not be something to be "ashamed" of, for an individual, a company, or a
government. Default is an option specifically written into every debt contract
out there. There should be no more shame in choosing to default as there would
be for choosing to exercise a stock option that causes your counterparty lose
all his money. Lenders reap a huge premium for doing nothing but assuming the
risk of default. If there was zero risk there should be zero premium.

No surprise that it's mainly bankers pushing the "it's immoral to default"
line.

~~~
cbr
I'm pretty sure taking out a loan that you intend to default on is fraud, but
making a contract with someone that you expect to be very profitable to you is
not.

~~~
analog31
If I were to look for fraud anywhere, I'd start by looking at the people who
give inflated ratings to bonds.

~~~
candiodari
What about politicians that use the government to take action against firms
when they lower particular ratings ?

Are those committing fraud too ?

What, incidentally, about politicians who force pension funds to buy bonds
"they like" by legal means ? (at least 200 politicians in current service are
guilty of this)

These are US government bonds, by the way, if a default happens with them, the
sort of organisation that will suffer the most is US pension funds.

[1]
[https://en.wikipedia.org/wiki/United_States_federal_governme...](https://en.wikipedia.org/wiki/United_States_federal_government_credit-
rating_downgrades)

------
6stringmerc
All that text about Puerto Rico's financial difficulties and not one mention
of the rampant fraud that spun up the debt from a reasonable amount to the $XB
that is likely to default is the result of graft, corruption, and fraud
enabled by many US and international actors.

Want to take a guess how many of those responsible for the transactions, debt
issues, and back-office fund transfers are in jail and all their assets seized
to repay the debt, a la Civil Forfeiture for drug crimes in the US?

I feel bad for the Citizens of Puerto Rico, because here in Dallas the Fire
and Police Pension fund is probably insolvent due to a combination of graft
and incompetence as well, and those responsible in both these circumstances
seem to just shrug it off and go on with life, their pockets lined more than
90% will ever see in 20 years of hard work.

Talking about the debt in Puerto Rico without firmly acknowledging the
conditions that led to it is irresponsible in my opinion. Hard to separate the
two. And, if we're going to talk about accountability for the latter, then we
should nail those who committed the former first. Likelihood of that? Heh,
yeah I'm not optimistic - doesn't mean I can espouse what I believe to be a
justifiable alternate course.

~~~
hkmurakami
Would love to read more on the subject if you have links to both the PR and
Dallas situations handy.

~~~
kmc059000
Here is an article on the Dallas pension problem.
[http://www.economist.com/news/finance-and-
economics/21711335...](http://www.economist.com/news/finance-and-
economics/21711335-pensions-crisis-has-been-brewing-decades-and-it-not-
confined-dallas)

The gist as I understand is that pensioners were promised a 8.5% return (which
didnt happen) and (some?) retirees are able to withdraw their current value in
their pension in full. There is talk of reducing benefits, which is causing a
situation much like a run on banks to occur.

I've seen a few proposed solutions such as having the state of Texas help pay,
to pillaging funds from DART (public transit), to tax increases.

It is a complete mess, and PR must be in such a bad position. In Dallas' case,
it is obviously corruption that caused the problem, with no penalty, and the
only recourse is to penalize those that did not cause the problem. Seems like
PR is in a similar yet more dire situation.

~~~
LeifCarrotson
Offering recourse to the pension-holders will clearly require penalizing
groups that did not cause the problem.

But can't we also penalize those that made the un-keepable promises and
mismanaged the funds? This won't make the policemen financially whole, but it
would offer at least some sense of justice, and, more importantly, send a
message to others currently operating similar schemes.

~~~
kmc059000
I'm not sure that is possible and I question if their actions were illegal.
Investing is risky and when actual returns did not beat the guarantees, the
investors decided to invest in riskier assets to attempt to make them whole.
However I'm not excusing their behavior and they are clearly to blame. There
was also questionable behavior but I'm not sure how illegal it was.

And if their actions were illegal, I wonder how many people were involved and
able to be prosecuted. I imagine there are many, from investors to
politicians, and thus an expensive endeavor for the city and state.

I think the best thing is to prevent this from happening in the future by
monitoring and exposing these shenanigans early rather than before it is too
late. Cities and states with pensions should take note of Dallas' problem and
act accordingly. Contracts should include clauses for penalties and recourse
so as to allow civil lawsuits.

------
grandalf
When issues of local government financial problems come up, I think it's
important to remember that local governments are typically not able to
undertake deficit spending the way the Federal government is.

If the US Federal government were prevented from running a budget deficit,
we'd likely see a lot more solvency issues and financial failures of many sub-
organizations within government due to bad budgeting. It would also be a lot
harder for our leaders to start wars or get away with sloppy cost estimates of
their grandiose ideas.

My argument is not that government should be small, simply that its spending
should reflect its income and the results of its spending should be easily
correlated with their cost.

Since the Federal government takes the lion's share of income taxes, local
governments are constrained in their ability to generate income. Yet for most
people, local governments provide the vast majority of the useful government
services they enjoy.

So while it may seem that the Federal government is comparatively stable and
responsible, the reality is that it's simply far less accountable to anyone
and is able to use that lack of accountability to launder its reputation.
States (or local governments) do not have the same luxury.

~~~
dragonwriter
> If the US Federal government were prevented from running a budget deficit,
> we'd likely see a lot more solvency issues and financial failures of many
> sub-organizations within government.

No, there's just be a lot more pressure to monetize government finances. We
have some safeguards against that (e.g., the Fed being separated from Congress
and outside of it's direct control), but the biggest constraint on that is
that the government, so long as Congress is free to set fiscal policy within
it's own preferences, has very little reason to choose the path of
monetization.

~~~
grandalf
I completely agree that our leaders would exploit loopholes. My point was
meant mainly to describe the scenario if the Federal government were
effectively constrained.

Would the public have supported a tax increase in 2004 when the cost of the
Iraq war began to drastically exceed estimates? Likely not, we'd have brought
everyone back home and saved Trillions and prevented a significant amount of
loss of life.

------
EternalData
I feel like local governments are going to be the first to really be affected
by significant pension overlays that are not properly accounted for -- a lot
of pension funds assume rates of return that are historically farcical. I
think the industry average used to be about 8%.

"During the 20th Century, the Dow advanced from 66 to 11,497. This gain,
though it appears huge, shrinks to 5.3% when compounded annually."

[http://davidgcrane.org/?page_id=702](http://davidgcrane.org/?page_id=702)

It doesn't auger well for the future of stable financial markets. Weak
localities will fail, and eventually the states that have to support them.
Puerto Rico is the canary in the coal mine.

~~~
mjevans
The answer to pension problems is real socialism. Produce in bulk, provide in
bulk, eliminate the waste and middle-person profit by providing as much of the
pension as possible directly so that the allowance for other items can be of a
much smaller serviceable size.

~~~
xmlblog
Which is why Cuba, Venezuela, and North Korea are doing so well. I'm astounded
people still think the idea of central production control has any juice left
in it after such a thorough debunking in the 20th century.

~~~
Gustomaximus
Which is why Norway, Denmark and Sweden are doing so well with all their
socialist programs.... so what now...?

I personally feel the right answer is in the middle. Socialise whats required
like health, education, emergency services, roads, pensions, etc And leave the
luxuries of life as free market.

As an extra touch, I would make politicians and civil servants required to use
public services rather than private alternatives. Because when they and their
families have to use public schools and hospitals etc they will care a bunch
more about how they run than if they are choosing private alternatives, which
is common in Australia at least.

~~~
ersii
All three of the mention countries have pretty much free, capitalistic
enterprise - which is the total opposite to what mjevans suggested.

That said, there is a huge government ("public") sector and the taxation is
high on most things. Especially income and consumption.

Basically, all of the socialist programs that's currently going on in the
Nordic countries rely heavily on taxing free enterprises (private sector) and
would work a lot less without them.

~~~
sebcat
> Basically, all of the socialist programs

social, not socialist.

~~~
oblio
Even better, the actual platform is called "social democracy":
[https://en.wikipedia.org/wiki/Social_democracy](https://en.wikipedia.org/wiki/Social_democracy)

Quite a different beast.

------
creaghpatr
A few months ago I discussed this with friends and suggested the government
subsidize cheap flights to Puerto Rico, say $30 for a round trip flight from
Atlanta, scaled up depending on domestic distance.

This would cost taxpayer money but would drive a ton of tourism to Puerto Rico
(albeit temporarily) and pump a bunch of money into their economy,
defibrillator style. I've never been there but given a cheap round trip flight
I would easily go and spend money.

The alternative appears to be some kind of bailout and/or debt restructuring
and I don't see that working out in the long term, which would presumably cost
taxpayers even more money.

~~~
emodendroket
Probably recreating the tax climate that attracted pharmaceutical
manufacturers and was allowed to lapse would be more effective than trying to
gin up tourism (although in my opinion probably that wouldn't be all that
helpful either).

~~~
mgbmtl
Lowering taxes only works if you can combine it with something else that will
keep the companies in place afterwards, such as a critical mass of specialized
workers, infrastructure, etc. Otherwise it's just playing the downward-spiral
game in a saturated market.

The federal government should create a 10-year plan to subsidize PR and fix
its economy/democracy from the ground up. If you look at Eastern Europe, it
takes a long time. One specific hack won't fix this, that's magical thinking,
and usually from corrupted politicians turfing their funders.

~~~
dmix
> that's magical thinking, and usually from corrupted politicians turfing
> their funders.

Subsidization is the game that corrupt politicians love. Not so much lowering
taxes (and therefore their power to choose the beneficiaries among their
friends/special interests). Unless of course the tax reduction is via a myriad
of specialized loopholes and deductions, then it could be directed at a chosen
few.

~~~
emodendroket
Spending money and cutting taxes are essentially equivalent, though.

------
rburhum
For the Spanish speakers of HNs, NPR's Radio Ambulante has an excellent
episode (called "deuda") that they did last year explaining the complexity of
the situation.

The short version is that a lot of the debt is held by the people of PR
themselves in form of bonds that were sold when the economy was good.

The reason it was artificially good is that for a long period it had great US
tax benefits when compared with other US territories/states. During that time
several corporstions (particularly pharma) had factories and jobs there.
During that time there was a boom in bond sales - a lot of predatory practices
that are reminiscent of the US housing bubble were done there, too. Once the
tax loophole was closed, corporations left the island, jobs went to shit, the
bonds could not be repaid, and all well, you get the picture. Except that in
this case, "not paying debt", literally means not paying a huge chunk of all
the life savings that people poured (arguably even patriotically) to their own
bond system (see the parallels to the housing crisis?).

You could technically boost the enconomy there by reintroducing similar tax
loopholes, but it would be a temporary fix, and there would be significant
struggles in the Senate and Congress... Taxation without representation sucks
big time...

Link to podcast:[https://16683.mc.tritondigital.com/NPR_510315/media-
session/...](https://16683.mc.tritondigital.com/NPR_510315/media-
session/5571309b-92cf-49c6-9897-5088c9d08229/anon.npr-
mp3/npr/ambul/2016/12/20161216_ambul_deuda.mp3?orgId=1&d=2261&p=510315&story=505690705&t=podcast&e=505690705&siteplayer=true&dl=1)

~~~
koolba
What percentage of the debt is held by private individuals and what percentage
is bets by traders?

~~~
cinquemb
I was wondering this too, who is exposed, by how much, and are those entities
publicly traded now?

In the Detroit one, bond holders were able to get back .75c on the dollar[0],
and I suspect the haircut here will be worse for bond holders.

[0] [http://www.barrons.com/articles/seven-lessons-from-
detroits-...](http://www.barrons.com/articles/seven-lessons-from-detroits-
bankruptcy-for-muni-investors-1414183339)

~~~
rburhum
See my response above for links :)

~~~
cinquemb
WSJ just released this today too: [https://www.wsj.com/articles/who-are-most-
exposed-to-puerto-...](https://www.wsj.com/articles/who-are-most-exposed-to-
puerto-ricos-bankruptcy-mutual-funds-and-hedge-funds-1493840870)

~~~
rburhum
Thanks for sharing

------
djsumdog
Puerto Rico should really be a state by now. Would it being a state given it
any distinct advantages (or are there any specific problems in light of it not
being a state) in this type of situation?

~~~
Animats
There's a statehood faction, an independence faction, and a big "don't upset
the gravy train" faction that likes the status quo. If Puerto Rico became a
state, US Federal personal income taxes would be imposed. If Puerto Rico
became an independent country, immigration to the US would be stopped.

There have been referendums on this. The next one is June 11, 2017.

~~~
kchoudhu
I know a very wealthy hedge fund manager who just moved to PR in order to
minimize (read: eliminate) his Federal tax burden.

Of course, as the current situation demonstrates, not being under the Federal
taxation umbrella has certain disadvantages.

~~~
zeroer
Wait. I though Puerto Ricans were only exempt from federal income tax on Pueto
Rican-sourced income.

~~~
dustinmr
Here's a local law where if you meet all the criteria (income made off the
island, spend > 180 days per year here, various other criteria), you're exempt
from income taxes here. And since you're a resident, all your income is here.
Effectively exempting you from federal income taxes.

The idea was to attract high net worth individuals to spend money here.

Every analysis I've seen says it has worked quite well.

~~~
martinald
Crazy. So if you move to PR but making money from other US based interests you
get exempted from US federal income tax, but if you move and work permentantly
in say Germany, you still get charged US Federal Income tax?

~~~
djsumdog
That was my question. The US is one of two countries where US citizens are
required to file taxes even if they're not living in the country (the other is
Eritrea).

~~~
dustinmr
If I remember correctly, PR and Guam are the two places in the world where
your income is exempt from federal income tax, if you pay local taxes. There
are some exceptions to that.

It's supposed to give some local autonomy to the taxation process and fiscal
management.

------
bradleysmith
I spent several months in Puerto Rico working on operations with Google's
Project Loon, launching balloons out of Cieba.

Seeing the island during September 2016 power outage was eye-opening. It was
admittedly a pretty bad event that spurred it, but portions of the island were
without power for several days. Infrastructure development is definitely
necessary, particularly considering the possibility of storm hits there.

It is a lovely island, I hope this manages to nudge along solutions from what
seemed to be a stagnating problem.

------
oneguynick
As you hear about Puerto Rico the next few days, take some time to get smart
on the history and dynamic. Highly recommend Congressional Dish Podcast that
came out a few weeks ago. Very good -
[http://www.congressionaldish.com/cd147-controlling-puerto-
ri...](http://www.congressionaldish.com/cd147-controlling-puerto-
rico/#more-2190)

------
sidmitra
There is an excellent episode on the podcast Radio-Ambulante on exactly this.
There're are accounts of a few people living there, small business owners etc.
if i recall correctly

[http://radioambulante.org/en/audio-
en/debt](http://radioambulante.org/en/audio-en/debt)

English translation: [http://radioambulante.org/en/audio-
en/translation/translatio...](http://radioambulante.org/en/audio-
en/translation/translation-debt)

------
elihu
I'm not super knowledgeable, but this seems to me like a good thing. If
investors lend money to a government that can't repay, they should lose some
of that money. I don't think whole economies should remain in a state of
economic slavery.

Is there some way in which this move might turn out bad for the people of
Puerto Rico, aside from it probably being more difficult to raise debt in the
future at a reasonable rate?

------
WillyOnWheels
The Marxist hidden in me says

* listen to Richard Wolff's views on Puerto Rico [http://www.rdwolff.com/tags/puerto_rico](http://www.rdwolff.com/tags/puerto_rico)

* listen to David Graeber [https://www.amazon.com/Debt-First-5-000-Years/dp/1612191290](https://www.amazon.com/Debt-First-5-000-Years/dp/1612191290)

------
gwbas1c
A lot of people forget that government debt is often funny-money. Defaulting
on debt is very different than not paying your friend back.

~~~
ww520
Only for governments that can issue money.

------
kirse
Are there any investment opportunities amidst this news? I've always wondered
how these massive bankruptcies play out.

------
kqr2
For a good intro to the Puerto Rico financial crisis, see this Planet Money
podcast :

[http://www.npr.org/sections/money/2016/04/01/472733338/episo...](http://www.npr.org/sections/money/2016/04/01/472733338/episode-693-unpayable)

------
ComodoHacker
TIL there are territories of the United States where the U.S. Constitution is
not fully applicable.

------
justforFranz
Does anyone know how much the US federal govt is on the hook for?

------
ksec
Ok, So China's economy is on the verge of collapse ( as the media likes to
paint it), it is not sustainable, but they are carefully trying to control it.

EU is, Brexit, Greece ( tiny compared to P.Rico ).....

And now U.S.

It seems we have more problems then we had after the Money Printing machine
turned to full power in 2008.

This may sound naive, do we actually have a recession in the past 20 - 30
years? We may have contraction, but actual recession? 2008, was like a come
and go event in such a short time frame.

And an even more stupid question, is a constant GDP growth, sustainable? Or if
we include the lowered value of currency we have been in negative already?

------
nom
[http://www.nationaldebtclocks.org](http://www.nationaldebtclocks.org)

I'll just leave this here.

------
danschumann
Their governor looks like Michael Scott. I've never understood why governments
go into debt. It's just stupid.

~~~
setrofim_
It's misalignment of incentives rather than stupidity (well, in some cases,
maybe also stupidity). Governments make decisions from one election cycle to
the next. So taking on debt that will be some future administration's problem
in order to finance public projects now, and increase the current
administration's popularity makes perfect sense.

------
masterleep
Illinois badly needs to do this as well.

~~~
bilbo0s
When you're looking for states that might be in trouble, you're looking for
places with certain attributes. For instance, high debt per capita and low per
capita income. Add to that low or decreasing populations and a few other
metrics and you can get a really good picture of which states will end in the
most trouble.

Illinois wouldn't be terribly high on that list. Your best bets for gaming
collapses would be places like Rhode Island, Mississippi and Louisiana. In the
next tier would be places like Kansas and Alabama. These are the places that
I'd wager will have the most trouble in the future.

But I'm not sure how you'd game any of this... because we're talking about
States, so bankruptcy protections would work differently.

------
rrggrr
> As is typical, decisions by politicians placed us in this situation. Decade
> after decade, 4-year term after 4-year term, the government has spent money
> it does not have.

Every time every one of us votes for any politician who favors any deficit
spending - and this is most of us - we give aid and comfort to this outcome.
We all want fiscal responsibility until its a cause that touches us
emotionally.

~~~
vkou
The United States will always be in some amount debt, and that's perfectly
fine. Going into debt, in order to invest into something with a good RoI is a
non-brainer.

It stops being fine when the debt exceeds its ability to pay - which, given
that it is in control of its own currency, never has to happen.

What you should be concerned is investments into things with poor RoI.
Corporate crony handouts, tax cuts to the rich, building bombs and dropping
them out of airplanes, and then rebuilding whatever they blew up, digging
ditches and filling them... All of these have incredibly poor RoI.

------
faragon
Apple could buy that debt and rename the island to "Apple Island", etc.

------
cpr
As Maggie Thatcher said: eventually you run out of other people's money.

------
azinman2
On the bright side, perhaps it's now a great time to buy property in PR?

------
guelo
The PROMESA bill is disgusting. An unappointed board filled with bankster-
friendly technocrats will now overrule democracy in Puerto Rico. The island is
in for a generation of recessions and low growth as the entire economy will be
permanently directed towards paying off bondholders.

------
hindsightbias
Why not sell of the island, or part of it for seasteading?

------
digitalneal
Wonder how bad it would be if they didn't subsidize rum production so heavily.

~~~
everybodyknows
How much is rum production subsidized? Hiding tax breaks for export industries
is hypocritical politics, but logical economics.

------
golemotron
Debt: The Next 5000 Years

------
kyleblarson
In 30 years bankruptcies like this one will look like peanuts compared to the
collapse of massively underfunded government employee pension funds that will
begin happening soon.

------
Taylor_OD
I was in Puerto Rico a year or so ago. I'm by no means a expert but it seemed
like a odd place to live. Mostly because its not a US state yet a good chunk
of the people seem to want it to be.

------
mirekrusin
Should I cash my USD now or should it be safe for few more months?

~~~
rrggrr
Money isn't a mechanism for the exchange of sovereign assets anymore. That
role has been supplanted by debt.

You wouldn't cash in your USD anymore than you would trade in your car because
petrol prices have fallen.

You _might_ cash in your US Treasury bonds. I say might because there is no
flight to safety from US bonds at nation-state scale. Treasuries are the only
game in town.

If all this is confusing then here's another way of looking at it... it
doesn't matter how precarious the US financial situation becomes until such
time as there is a scaleable, stable and transparent alternative means of
storing, buying, selling, lending, investing value.

~~~
SEJeff
So perhaps the successor to the successor to bitcoin, in another 10 or so
years?

