Congress to take up Puerto Rico Bankruptcy?

This week, nothing mattered much beyond Greece. The situation has been well-covered, so no reason to recount the story here.

But, the governor of the island state of Puerto Rico (which is a U.S. territory) told the New York Times that Puerto Rico cannot pay its debts. The government and various agencies risk default this month.

Puerto Rico had two big economic contributors in the past – the U.S. military and favorable tax treatment for pharmaceutical companies operating on the island. Both of these things went away over the past 15 years, leaving the country with a big hole in its economy and a bloated government. The territory ran a deficit in every year since 2007 except one, and yet continues to increase government spending. The government employs roughly 27% of the workforce..

As a territory, the island operates like a state in the U.S., and there’s no provision in the Federal Bankruptcy Code for such an institution to declare bankruptcy. Puerto Rico has been pushing Congress to take up a couple of bills that would allow some of the public agencies on the island to declare bankruptcy, but nothing has happened on that front.

The territory’s constitution explicitly states that it must pay its debt before all other expenses, which includes rent, wages, and pensions. What are the chances that Puerto Rican leaders will send all available cash to bondholders and not pay their workers or retirees?  Zero. Anticipate congressional action after the Fourth of July Holiday.

Greece fails to elect a President in Three Attempts

Greece fails to elect a President in Three Attempts… The New Democracy Party suffered a setback when its candidate for President fell short of the votes necessary for election.

What it means — After three attempts, the Greek political process calls for a snap election, which at this point favors the far-left leaning Syriza Party. This group has called for renegotiating the terms of the Greek bailout, demanding cuts in what is owed to the European Central Bank (ECB) and other creditors, and restoring social payments.

The possibility of Syriza gaining control of Greece sent that country’s stock market tumbling and yields on Greek debt soaring. Greek 3-year bonds now yield more than 12%. The troika that provided the bailout to Greece has suspended all payments until the country’s political situation is stabilized. If Syriza takes control, the possibility of Greece exiting the euro would be back on the table.