Puerto Rico,
literally the "Free Associated State of Puerto Rico, is a United States territorylocated in the
north eastern Caribbean. It is an
archipelago that includes the main island of Puerto Rico and a number of
smaller islands. Its official languages are Spanish, and English.In
Greece, banks and markets throughout the country are closed until next week,
after Prime Minister Alexis Tsipras interrupted last-ditch debt negotiations
early Saturday with the announcement that he was calling a referendum on 5th
July to decide on whether to accept the tough terms offered by international
creditors.
When Greece joined
the euro in 2001, confidence in the Greek economy grew and a big economic boom
followed. But after the 2008 financial crisis, everything changed. Every
country in Europe entered a recession, but because Greece was one of the
poorest and most indebted countries, it suffered the most. The unemployment
rate reached 28 percent in 2013, worse than the United States suffered during
the Great Depression.If Greece wasn't in the euro, it could have boosted its
economy by printing more of its currency, the drachma. This would have lowered
the value of the drachma in international markets, making Greek exports more
competitive. It would also lower domestic interest rates, encouraging domestic
investment and making it easier for Greek debtors to service their debts.But
Greece shares its monetary policy with the rest of Europe. And the
German-dominated European Central Bank has given Europe a monetary policy
that's about right for Germany, but so tight that it has thrust Greece into a
depression.
So Greece is squeezed between a
crushing debt burden — 177 percent of GDP, about twice the level in the United
States — and a deep depression that makes it difficult to raise the money it
needs to make its debt payments.Rich European nations such as Germany believe
they're simply insisting that Greece live within its means. But the austere
terms of the bailouts have caused resentment among Greeks and contributed to
crisis-level unemployment and poverty. In January, they elected a new left-wing
prime minister, Alexis Tsipras, who promised to reject the previous bailout
deal and secure a more favorable agreement.As it turns out, the Greek crisis
ends not with a bang, but with a referendum.
The next few days are shaping up to become a
transformational moment in the 60-year project of building a unified Europe. A
“Yes” vote in the referendum would mean that Greece will continue the grinding era of
austerity that has caused so much pain to its citizens over the last five
years, in exchange for keeping the euro currency and the monetary stability it
provides.A “No” vote almost certainly means that the country will walk away
from the euro and create its own currency (which will surely devalue sharply),
bringing financial chaos in the near term but creating the possibility of a
rebound in the medium term as the country becomes more competitive with its
devalued currency.
Meantime, the Greek banks are, or will
soon be, out of money, and the E.C.B. will be disinclined to open the
floodgates again in the absence of a bailout deal. That’s
why the Greek government has effectively frozen its financial system, closing
banks and the stock market on Monday.
Miles away, Puerto
Rico’s governor, saying he needs to pull the island out of a “death spiral,”
has concluded that the commonwealth cannot pay its roughly $72 billion in
debts, an admission that will probably have wide-reaching financial
repercussions.The governor, Alejandro García Padilla, and senior members of his
staff said in an interview last week that they would probably seek significant
concessions from as many as all of the island’s creditors, which could include
deferring some debt payments for as long as five years or extending the
timetable for repayment.
“The debt is not
payable,” Mr.García Padilla said. “There is no other option. I would love to
have an easier option. This is not politics, this is math.”It is a startling
admission from the governor of an island of 3.6 million people, which has piled
on more municipal bond debt per capita than any American state.A broad
restructuring by Puerto Rico sets the stage for an unprecedented test of the
United States municipal bond market, which cities and states rely on to pay for
their most basic needs, like road construction and public hospitals.That market
has already been shaken by municipal bankruptcies inDetroit; Stockton, Calif.;
and elsewhere, which undercut assumptions that local governments in the United
States would always pay back their debt.
Puerto Rico’s bonds
have a face value roughly eight times that of Detroit’s bonds. Its call for
debt relief on such a vast scale could raise borrowing costs for other local
governments as investors become more wary of lending.Perhaps more important,
much of Puerto Rico’s debt is widely held by individual investors on the United
States mainland, in mutual funds or other investment accounts, and they may not
be aware of it.Puerto Rico, as a commonwealth, does not have the option of bankruptcy.
A default on its debts would most likely leave the island, its creditors and
its residents in a legal and financial limbo that, like the debt crisis in
Greece, could take years to sort out.
Still, Mr.García
Padilla said that his government could not continue to borrow money to address
budget deficits while asking its residents, already struggling with high rates
of poverty and crime, to shoulder most of the burden through tax increases and
pension cuts.With other payment deadlines looming, Mr.García Padilla and his
staff said they would begin looking for possible concessions on all forms of
government debt.In June, Puerto Rico hired Steven W. Rhodes, the retired
federal judge who oversaw Detroit’s bankruptcy case, as an adviser. The
government is also consulting with a group of bankers from Citigroup who
advised Detroit on a $1.5 billion debt exchange with certain creditors.
So, there are Nations, which are
buried deep in debt crisis.
With regards – S.
Sampathkumar
30th
June 2015.