How Governments React to Bankruptcy

[courtesy Google Images]

“The crisis in Puerto Rico continues to spiral out of control.”

Maybe so, but I don’t regard Puerto Rico’s plight as big news. I don’t see Puerto Rico as being the domino that starts the chain reaction that eventually, topples the U.S. economy.

Even so, Puerto Rico’s reaction to its default is interesting as an indicator of what may happen to the US when the U.S. government also inevitably defaults on its debts.

•  According to Michael Snyder, “The following is an excerpt from a letter that Treasury Secretary Jack Lew sent to Congress:”

“Although there are many ways this crisis could escalate further, it is clear that Puerto Rico is already in the midst of an economic collapse. . . . Puerto Rico is already in default.”

P.R. isn’t paying its existing debts.

“1.  It is shifting funds from one creditor to pay another . . . .”

P.R. is robbing Peter to pay a more politically-connected Paul; the political favorites who are “too chummy to fail” will be paid as long as possible.

And P.R. has,

“2.   Stopped payment altogether on several of its debts.”

Those who are mere investors and not particularly chummy with government are already losing the cash owed to them.

“3.  Creditors are filing lawsuits.”

The creditors who sue P.R. better pack a Snickers bar because they’re going to be in court for a long time before they ever get paid.  In the end, they’ll probably receive only a relatively small percentage of the debt due (take a “haircut”).

P.R. creditors have no more chance of collecting all of the money owed them than do the creditors who loaned money to Greece.  What can’t be paid, won’t be paid.

•  Puerto Rico’s Government Development Bank, which provides critical banking and fiscal services to the central government, only avoided depleting its liquidity [exhausting its supply of cash and becoming openly insolvent] by:

“1.   Halting lending,”

The Puerto Rican “Government Development Bank” didn’t actually “halt lending” by choice.  They ran out of cash.  The P.R. “Government Development Bank” is broke.

 “And,

“2.  Sweeping in additional deposits from other Puerto Rico governmental entities.”

So far, it’s easier for P.R.’s territorial government to rob the city and county municipal accounts than it is to rob the Puerto Rican people.  But, you can bet that as soon as the municipal accounts are exhausted, the Puerto Rican government will start to rob the people’s savings accounts and other bastions of private savings.

•  In broad strokes the official Puerto Rican reaction to their government’s defaults has been to:

Rob its creditors by stopping payment on debts due. There aren’t many creditors and nobody likes ‘em anyway because they’re rich.  Governments can rob rich creditors without causing much adverse political reaction.

Rob smaller governmental agencies and entities. Nobody likes government, either. Therefore, robbing cities and counties will create only a little more political heat than robbing rich creditors, but not as much as will be created when the government robs the people.

Ignore the resulting lawsuits since most are filed by creditors without political clout and they’ll take years to settle.

Rob the ever-dangerous and unpredictable Puerto Rican people (but only as a last resort)—and hope they don’t riot and burn the island down to the water line and/or hang the government officials.

•  Implication? Faced with bankruptcy, most governments (including that of the United States) will first rob those with the least political clout (rich creditors), then rob those with some political clout (smaller governmental entities) and only as a last resort, risk robbing the people who have the most political clout and just might riot.

There’s a good chance that when the US defaults—as it must since the National Debt can’t be paid in full or even substantially—we’ll go through a very similar set of steps:  1^st, rob its rich creditors; 2^nd, rob smaller governmental savings accounts, and finally, 3^rd, rob the American people of their savings.

Repaying the debt is all about politics.

If you’re a creditor and politically connected, you might get paid.

If you lend money to the government, but you’re not politically connected, the probability that you’ll be robbed by the government is high.