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World View: Puerto Rico to Restructure After Congress Fails to Allow Bankruptcy

This morning’s key headlines from GenerationalDynamics.com

  • Puerto Rico negotiates restructuring after Congress fails to allow Chapter 9 bankruptcy
  • China’s military on high alert when US bombers flew over South China Sea
  • Delusional claims made during the Democratic debate

Puerto Rico negotiates restructuring after Congress fails to allow Chapter 9 bankruptcy

Old San Juan, the center for Puerto Rican tourism, on November 12, 2013 (Getty)
Old San Juan, the center for Puerto Rican tourism, on November 12, 2013 (Getty)

Congress has passed the humongous $1.1 trillion spending bill for next year, and President Obama has signed it. It will completely bust the sequestration that has kept governing spending down for several years, and now we can expect that federal deficit to really explode in size next year. (See “2-Feb-15 World View — Washington joins the world in explosive spending splurge”)

But one Christmas present left out of the bill was an Obama-favored proposal to allow Puerto Rico, much of whose economy is close to debt default, to take advantage of chapter 9 bankruptcy laws. According to Puerto Rico governor Alejandro García Padilla:

By not acting now, Congress has opted for the U.S. commonwealth to default on its obligations and unfold into chaos. Once again Wall Street has demonstrated its control over Congress; Wall Street rules Congress.

Puerto Rico faces an enormous $72 billion debt, $900 million of which it must pay to bondholders on Jan. 1. According to Padilla, Puerto Rico will default on its debt in January or May.

In many ways, Puerto Rico has gotten a free ride from Congress for years. Congress granted Puerto Rico investments a “triple-tax free” tax rate. This means that you can invest in Puerto Rico’s bonds and earn 10% interest every year, and not have to pay federal, state or municipal tax on the interest you collect. There were other major tax benefits granted exclusively to those investing in Puerto Rico.

The money that investors paid for these bonds has been essentially “free money” to Puerto Rico, since nobody apparently believed that it would ever have to be paid back. As a result, Puerto Rico has felt free to spend huge amounts of money on social programs, with bills that are only now coming due.

Detroit defaulted on its debt several years ago, but it did not really hurt too many people, because the bankrupt debt was $18 billion, and few ordinary people owned Detroit bonds, as most investors were institutions that hedged their purchases with credit default swaps.

A Puerto Rican debt default is likely to be much more widespread. The triple-tax free 10% interest deal has drawn massive amounts of money from 401k’s and other ordinary investment funds. These funds will all lose significant principal in a Puerto Rico default.

Almost all Republicans were opposed to giving Puerto Rico retroactive bankruptcy protective protection, since that would only benefit the bondholders who took advantage of the triple-tax free 10% deal. However, House Speaker Paul Ryan promised to come up with a “responsible solution” by March 31. According to Ryan, “While we could not agree to include precedent-setting changes to bankruptcy law in this omnibus spending bill, I understand that many members on both sides of the aisle remain committed to addressing the challenges facing the territory.”

Foreseeing the likelihood that Puerto Rico would not get debt relief from Congress, negotiations have been proceeding. On Friday, Puerto Rico’s electric utility reached a tentative agreement with insurance companies MBIA Inc. and Assured Guaranty Ltd., along with some bondholders, to restructure the utility’s $8.2 billion of debt, This potentially averts a default on January 1, and raises hopes that there will be no default in May either. NBC News and The Bond Buyer and Bloomberg

China’s military on high alert when US bombers flew over South China Sea

China’s military went on high alert two weeks ago on December 10, when two American B-52 bombers flew into the airspace within two miles of one of China’s artificial man-made islands in the South China Sea.

According to China’s Ministry of National Defense on Saturday,

Such actions have severely threatened the safety of Chinese personnel and facilities as well as peace and stability of the region. […]

The actions by the U.S. side were a serious military provocation, creating complex conditions in the South China Sea and even militarization in the region.

The Pentagon said Friday that the two bombers flew closer than planned to Cuateron Reef in the Spratly Islands and that the incident is being investigated.

The Navy’s 7th Fleet, based in Japan, regularly patrols the South China Sea. According to one analyst:

We need to remind ourselves that [the] U.S. Navy … has been conducting freedom of navigation operations since Jimmy Carter was in office. If you simply acquiesce to somebody else’s claims, you could lose your rights.

Secretary of Defense Ash Carter has repeatedly said that “The United States will fly, sail, and operate wherever international law allows, as we do all around the world.” Xinhua and USA Today and Navy Times

Delusional claims made during the Democratic debate

I watched the Democratic debate on Saturday evening, and want to comment on a couple of delusional claims that I’ve written about many times before.

Delusional claim #1: We should protect Americans by passing gun control laws.

This is delusional for several reasons:

  • Every time gun control is discussed, gun sales surge. Gun-maker Smith & Wesson tripled its profits last quarter. Gun background checks broke records on Black Friday of this year. There’s even a new GunTV cable channel debuting on January 16.
  • Gun control talk stimulates the development of gun manufacturing in your garage with 3D printers – something that’s already pretty sophisticated.
  • Like it or not, there are already far more guns than people in the United States, and that’s not going to change.

According to one analyst, “The [number one] driver of firearms sales is fear– primarily, fear of registration restrictions, banning and things like that.”

So gun control talk only increases the number of guns being sold and used.

Delusional claim #2: The 2003 Iraq war was the biggest foreign policy blunder in American history. Also, according to Bernie Sanders, it caused the destabilization of the entire Mideast.

As I’ve written many times, Bernie Sanders and anyone who thinks that the Iraq war was a mistake should be held accountable for his willingness to allow Saddam Hussein to kill tens of thousands of people with weapons of mass destruction.

Saddam had already attacked Iran with WMDs in 1988, so Iran knew that Saddam would not hesitate to do it again, if given the chance. During the recent nuclear negotiations, it emerged that Iran had been developing nuclear weapons for decades, but Supreme Leader Seyed Ali Khamenei ended that development in October 2003, and that would not have happened if the Iraq War had not proved that Saddam was no longer developing nuclear weapons. ( “29-Oct-15 World View — Iran’s government splits over implementation of nuclear deal”)

So the Iraq war was not only not a blunder, but may have prevented a nuclear war between Iran and Iraq.

As for destabilizing the Mideast, the Arab Awakening was triggered by the death of a street vendor in Tunisia, which had nothing to do with Saddam. And whatever you think about the Libya intervention, it had nothing to do with Saddam. BBC and PJ Media and Politico (22-Jun-2015)

KEYS: Generational Dynamics, Puerto Rico, Alejandro García Padilla, Paul Ryan, MBIA Inc., Assured Guaranty Ltd., China, South China Sea, Cuateron Reef, Spratly Islands, Smith & Wesson, 3D printers, Saddam Hussein, Iraq, Iran, Tunisia, Libya
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