I had not seen so many inaccuracies, innuendos and half truths in a long time until I read the Report by the Democratic Staff of the Committee on Natural Resources entitled Profit at any Cost: How Some Hedge Funds Win By Making Sure Puerto Rico Loses.
They start by saying that the “amount Puerto Rico owes now exceeds the size of its entire economy.”(Page 2) Bull! According to the World Bank, in 2013, PR’s GDP was $103,134,778,000. This is the latest official figure we have. Even with reduction of the GDP, $72,400,000,000 debt is only about 69% of the GDP. If we look at Greece, it is 177.1%, Belgium is 106.5%, Italy is 132.1% and so on. And the reason GDP is used instead of GNP is because it gives you a better measure of what you can tax in order to pay the debt.
Another inaccuracy is that most of the debt is held by public corporations. They hold around $25 billion of the PR debt. According to the latest Government Development Bank Quarterly Report dated May 7, 2015, PR’s GO debts total $23,804 billion. PR’s GO’s have the protection of the island’s constitution which requires that in case of a lack of funds in the budget, they be paid before anything else. See, Article VI, section 8 of the Constitution. That leaves us with $48,400 billion as potentially subject to Chapter 9. However, 11 U.S.C. § 109(c) requires that state law specifically allow a municipality or public corporation to file for Chapter 9 protection. If Law 71-2014, the Recovery Act, is any indication of the legislature’s intent, municipalities (because their biggest creditor is the GDB), the GDB and its subsidiaries, Fideicomiso de Niños, the Commonwealth’s Retirement System and its instrumentalities, the Judicial Retirement Fund, the Agency for Municipal Financing, AFI, COFINA, the Teacher’s Retirement Fund, and others were excluded from filing for its protection. Therefore, one can conclude that the legislature would not allow them to file for Chapter 9 protection. If one excludes these parties bonds, one is left with only $24,914 billion that could file for Chapter 9 protection, leaving $47,290 unprotected. See pages 56 and 64 of Government Development Bank Quarterly Report dated May 7, 2015. In a report designed to convince of the importance of Chapter 9, this should be mentioned.
The report also states that the causes for the crisis are manifold but only points out to low employment and labor participation and lack of tax advantages. (page 2). It does not mention the increase of expenditures by the Government and over $12 billion in new taxes collected from 2006 to 2015. See page 20 of El Ultimo Tarjetazo: de la Chatarra a la Oportunidad by Gustavo Vélez 2015.
In pushing for Chapter 9, the report (pages 2-3) claims that creditors and debtors will delegate the decision of the debt to the Bankruptcy court. True, but it forgets a couple of things. PREPA, PRASA etc., have very active and powerful unions, whose contracts can be impaired under bankruptcy law, as well as pensions, as they were in Detroit. Bondholders lost more, but these two groups also got a haircut. Is this what stakeholders want? Doubt it.
Report continues saying that hedge funds have offered to buy PR’s debt in “exchange for extraordinary financial guarantees.” Wonder what that would be? In 2014, PR issued $3.5 billion in debt, waived 11th Amendment immunity, allowed to be sued in NY and the issue was to be governed by NY law. Lately, the news say that bondholders want 10% interest, which is what the latest issue is paying right now and a lock box, which we have in the COFINA bonds. Nothing extraordinary there and nothing new.
The Report bemoans (at page 3) the Loser report saying it calls for cuts in teachers, without mentioning that there has been a reduction of 25% students enrollment and expenditure increase of 39%. It also fails to mention that the economic report by Dr. Anne Krueger also recommends the firing of teachers and other cost cutting measures.
At page 4 the report quotes the doyen of liberalism, the NYT, by denouncing austerity, without mentioning that this is the standard IMF recipe, espoused both by Dr. Krueger and Dr. Loser. Just take a look at what happened in Greece, Ireland, and Spain.
Also at page 4 the report states “BlueMountain Capital Management in July filed the law suit that prevented the government of Puerto Rico from implementing a law allowing public municipal authorities to restructure their debt.” Actually, Franklin California Tax Free Trust was the first to file and the report fails to mention that both the Federal District Court for the District of Puerto Rico and the First Circuit Court of Appeals determined that the PR law was preempted by Federal law. Oops.
The rest of the report tries to show that since 2014 investors knew that investing in PR was risky. This assumes that because it is risky, all the legal recourses of the documents have to be suspended. This is a ludicrous idea. Moreover, it fails to show how much of the bonds are owned by hedge funds. Although I have not found a study on this issue, what most analyst have mentioned is a 15% ownership. In addition, even if it were 50%, that does not change the fact that there are many investors who bought the instrument at full value when it was issued and for whatever reasons, decided to stick with it instead of selling at a deep discount.
Reports like this do not help PR. It actually hurts it. One expects better performance from Congressional staff.