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May 23, 2016


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Less than great deal is worse than no deal. What's needed is a workable plan. It probably involves a *lot* of bond losses or taxpayer bailouts. Then some sort of actual economic plan that is sustainable for PR.

This is mostly a recipe for more Flints.

The premise is incorrect.

OK, I have a little more time. But I have to admit that your response worries me. I'm going to repeat what I wrote above.

If there is no bill, courts will begin attaching Puerto Rican government assets. That means tax revenues as they are banked. Paychecks and expense payments will be stopped -- randomly -- and the Puerto Rican government will be shut down piecemeal.

The closest example would be the way sanctions link shut down the Panamanian economy in 1988.

The premise of your statement is that the Puerto Rican government can selectively default on the state's debts. That premise does not hold.

In other words, you're flat wrong that "Less than great deal is worse than no deal."

My retired aunt and uncle, resident in San Juan since 1982, have established Ohio domicile- it's all a big mess.

It's a massive mess. The Oversight Act does a good job of dealing with the immediate uncertainty.

The Act gives Puerto Rico a six-month stay on all judicial actions; it then allows the government to seek bankruptcy protection of all debts. It also imposes collective action clauses on the creditors. Those provisions give the island the room to come up with a restructuring plan; right now, with the courts closing in, it doesn't have that space.*

The Oversight Board is the equivalent of the Emergency Financial Control Board (EFCB) that New York State imposed on NYC in 1975 ... although with significantly less authority to start. (It only steps in if the Commonwealth government breaks specific guidelines.) Emergency Managers in Michigan (under the Fiscal Accountability Act of 2011) have greater powers still.

To be honest, the Oversight Board is unnecessary and undemocratic, but accepting it was the only way to get the bankruptcy bill through the House.

I wish Bernie wouldn't play politics with this; the bill will need Democratic votes to get through. The problem is that there aren't a lot of costs to mainland politicians if the bill fails -- I'm amazed Ryan has been able to shepherd it this far -- so failure is very much an option.

If I thought that Senator Sanders was playing 11-dimensional chess I'd be okay with the games -- although note that Senator Rubio lost my support over this sort of thing, and Rubio did have a claim on being a very good legislative chess player!

I certainly could see his proposal as a Plan B if Congress doesn't act. http://www.salon.com/2016/05/24/bernie_says_bail_out_puerto_rico_sanders_details_how_the_feds_should_rescue_the_territory_as_they_did_big_banks/

You mean , legally, politically or economically?

Legally, it's iffy. The article mentions 13(3) but makes light of the other concerns. The Fed won't want to go there, absent systemic risk. Which brings us to ...

Politically, it's impossible. There would be cries of moral hazard and bailout, which would have the advantage of being true. With little price to pay, those cries would win.

Which makes the economics irrelevant, and Bernie a terrible politician. Surprising, no?

The only thing which makes sense is to wait and pray for a favorable SCOTUS decision.

That's plausible, with Alito recused. But it's risky. There would be a food fight over the meaning of Article 6 of the Puerto Rican constitution, particularly in light of Section 8 of the aforementioned article. Puerto Rico would need to win two bets. First, that Kagan and RBG vote as expected. Second, that no stays are granted when the Puerto Rican Financial Emergency Act is inevitably challenged under Article 6 grounds.

P.S. One thing to keep in mind is that Gov. García has been very canny. He could have imposed even deeper austerity and kept the balls in the air; instead he started to selectively default and push the issue. That will change your view of the situation depending on your political priors and the weight you give to creditor rights.

P.P.S. I find it sadly ironic that Senator Sanders is doing exactly what Paul Singer wants him to do.

I wasn't talking about the bankruptcy part. I was talking about the benefit of lots of Republican appointed leaders, who are likely to act on ideology more than any real sense, which is why I mentioned Flint. Also, I wasn't arguing for the PR government, really, to be aggressive. I'm basically arguing from the viewpoint that the Obama Administration held out for a cleaner and more comprehensive plan.

My concern is for the longer term. The economy of PR has to be made viable, and a *bad* restructuring probably renders the long term goal less achievable. As such, it makes the final cleanup ever more expensive. Basically the same principle that Greece should have made or break it in 2010. Do we even want to be in the situation, in 2022 where we get reports on the health of PR comparable to the recently released IMF reports on Greece? Like--normal unemployment in 2060 sort of bad? And in our case, the US is on the hook, ultimately, for PR success or failure in a way not true of the Troika.

Without a sense that there is leadership and a path out of economic troubles, everyone will continue to abandon PR for mainland US, the businesses will follow, and the tax base will shrink. The people who, for whatever reason, cannot leave are also the ones that are the biggest drains on PR energies. This is no time for half measures or abusive austerity blended with wishful thinking about cheap ways to generate income. Again, a bad plan is worse than no plan. Confidence (no, not in the sense of promoting mere economic orthodoxy) is what is important here. Clarity about the future prospects of *gains* is what is important here.

Hmmm, Also need to clarify. There will be either: big losses for creditors or a big bailout for them. Worrying about the politics is probably meaningless in many scenarios, and encourages fruitless can-kicking that results in a more painful process, absent an unlikely upturn in world trade.

Some of the decisions to create a deliberate lack of harmonization of Puerto Rico's financial status are within the realm of living memory. It would be worthwhile, I think, if only for forensic purposes, to figure out what inspired them -- because it is honestly bizarre for this situation to emerge without figuring out, what the hell, people.

The SCOTUS briefs are unbelievable: they literally read as though Congress did it for no reason at all. Somebody needs to ask the protagonists.

Because it is thoroughly nuts.

I can't make much out of the pattern within the Fed, either. These aren't boilerplate.

Aaaaand connecting to the actual topic, I am in agreement with you on Bernie's plan, mostly because I've read the objections you raised elsewheres and agree with that. Just whining (with justice, I believe) about the inadequacy of the plan that got passed.

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