Things Fall Apart: Greece and Puerto Rico
by meep
And that’s just today’s list.
In the case of some of these, things are moving rapidly, after years of festering. More on that at the bottom of the post.
GREECE
So, this thing with Greece has been going on. I’m a bit sore about it, because I had made a prediction on what would happen with the Good Judgment Project and I was extremely wrong.
But then, my poor predictions have no consequences other than damage to my ego, which can take it.
The Greek people… not so much.
The news below will likely be stale by the time I end this post, but eh.
- Greece Shuts Banks to Prevent Collapse (good luck with that)
- Stocks Tumble Around the World on Greek Crisis
- Live Market Analysis from WSJ
- Twitter feed on Greek Crisis
Heck, that last one should keep the news rolling.
Blog commentary on the situation:
- Greece Runs Out of Other People’s Money from The Other McCain
- Sudden Stop Thesis: What Are the Odds of Grexit Within Three Weeks? from Mish
- Greece Braces Itself for a Turbulent Week from the Atlantic
- It Sure Looks Like Greece Will Exit the Euro from Ace of Spades
I am not so foolish as to make predictions as to what will happen today, much less this week. I’ve already gotten burned once on this one, thank you very much.
PUERTO RICO
This one might be news to you, if you’ve been following the big governmental money stories.
Puerto Rico can no longer make payments on its $73 billion in debt, according to Governor Alejandro Garcia Padilla, who warns the island is perilously close to entering a “death spiral”
“The debt is not payable … there is no other option. This is not politics, this is math,” Garcia Padilla told the New York Times in an interview published Sunday evening. “But we have to make the economy grow. If not, we will be in a death spiral.”
…..
Puerto Rico’s economy has been in hot water for years, due to government overspending, high energy costs and dependence on debt. Now, the U.S. territory is dangerously close to default.In an attempt to avoid a missed payment, the Puerto Rican government is now seeking concessions from its creditors, including deferring some debt payments, or extending the repayment schedule. It seems no one will emerge from this crisis unscathed: Garcia Padilla is now urging the island’s creditors to “share the sacrifices.”
One flashpoint is a $400 million debt payment that government-run electricity provider, PREPA, must make on July 1. It’s a debt that PREPA almost certainly can’t pay in total — Moody’s has rated the electricity company’s bonds in the lowest possible category.
Let me see if I can find that info from Moody’s.
You have to register with Moody’s to see the rating history, but I will tell you the last rating action I see: in September 2014, Moody’s downgraded PREPA’s ratings to Caa3 from Caa2; and gave a negative outlook.
How low is a Caa3 rating?
It’s a notch above being in default. They’ll be there soon enough.
Unfortunately, the stats on credit ratings are for corporate bond experience, but I think the 36% default probability for Caa-rated corporate bonds gives you an idea of the riskiness (the table is on page 24)
Back to the article:
PREPA itself has about $9 billion in total debt — by comparison, when Detroit went into bankruptcy, it shed $7 billion.
Things have gotten so bad that Puerto Ricans of all social classes have left in search of jobs elsewhere.
Between 1980 and 2000, the average annual migration of Puerto Ricans to the mainland United States was 12,000 people. From 2010 to 2013 — when the economy started tanking — that figure jumped to 48,000 people per year.
The population estimate for Puerto Rico is about 3.5 million people. So 48K is a little more than 1% of the population per year for four years. That’s pretty big for population movement.
Especially since you can be sure it’s not people of all ages who are moving… it’s going to be people in the prime working (and tax-paying) ages. This would be a good lesson for places such as Illinois or just Chicago, when contemplating raising taxes. Puerto Ricans can move to anywhere in the U.S. easily as they’re U.S. citizens, just like most of the tax-paying residents in the states.
I was at a family do this past weekend, and my mom’s generation (solid Boomers) are making the retirement transition right now.
Some have taken up official residence in Florida or Texas to avoid income taxes on their retirement income. Those people are really mobile, especially right after retiring, because they don’t have to be in a particular location to work. They’re not working any more. So they’re looking for something cheaper. (And they don’t live in Florida/Texas year-round — New Yorkers are familiar with this. These snowbirds come back to NY in the summer, for only so long not to regain residency here. I actually love NY winters and just suck up the taxes, but most people aren’t crazy like me.)
Moody’s credit outlook for this week is here, and it mentions the Puerto Rican situation if you want to look at some of the details. They are in a liquidity crunch for sure, which is not necessarily troublesome in the long-term. But they’ve got a lot of debt for their economy.
A WHIMPER THEN A BANG
Or maybe I should say a lot of whining, then the bang.
Both Greece and Puerto Rico have been unraveling for a very long time. These crashes just kept accumulating until the breaking point.
Remember my post on the fragility of Can’t Fail thinking?
Here is the problem: all sorts of entities directly involved in public pensions have thought that the pensions can’t fail. Because of stuff like: constitutional protections of benefits (so paying pensions would take precedent over other spending needs, like paying for current services), “government doesn’t go out of business”, the supposedly infinite taxation power of the government, and so forth.
Because they thought that pensions could not fail in reality, that gave them incentives to do all sorts of things that actually made the pensions more likely to fail. Because, after all, the taxpayer could always be soaked to make up any losses from insane behavior.
Except when there are no taxpayers, of course.
Taking an analogy from stuff I do — I have dealt with error-handling in programming, and there are a couple ways to handle errors:
- Catastrophically
- Silently
(Yes, there are more than those)
But the problem with silent error-handling, where you just skip to the next line of code without notifying the user, is that often it ends up with catastrophic failures.
When it’s only a game you’re coding, it’s only a professional danger for the coder.
When your program deals with finance… it’s not so benign when the code goes loopy.
Similarly, the “kick-the-can” approach to public finance floats along, slowly degrading over time, and then BOOM.
It all falls apart.
It’s not fun to watch.
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