The Curious Case of Aurelius Capital vs. Puerto Rico
nytimes.com
nytimes.com
The other point in the article is simply that these funds are not the original debt holders. But what difference does that make? If your neighbor owes you $100,000, and refuses to pay, I might buy the debt at $50,000 in return for the hassle of collecting it. Is there something wrong with that? Should the debt be forgiven merely because of that?
The article overlooks that legal rules alter primary behavior. People alter their decisions about lending based on what might happen, legally, if the investment goes sideways. The original lenders, who put up money that allows Puerto Rico to pay for various things, did so within a legal regime where it knew Puerto Rico couldn’t declare bankruptcy. They might not have lent the money at all otherwise. Moreover, in general lenders make lending decisions knowing that they can sell bad debt to collection firms or third parties. Eliminating the legal rights of those third parties alters the lending decisions of the primary actors going forward.
[1] I’d go so far as to say that it’s doubtful the author would appeal to Puerto Rico’s poverty if this was a debt owed by Italy, because the reader wouldn’t be as sympathetic. Which frankly is not a very nice thing, viewing Puerto Rican differently than Europeans who are identically situated economically.
Hurricane Maria has caused $140 billion of damages to a country with a GDP of $100 million. What would the U.S. look like if it had a natural disaster that cost $20 trillion in damages?
It sounds like you need to make a visit and drive around. Some parts of the island still don't have power, even today.
The reason seems to be corruption. The debate is around the balance between intrinsic and extrinsic corruption, with good arguments on both sides.
Puerto Rico isn’t poor. But it is in a crisis. That discrepancy contains the problem and solutions.
Using GDP per capita (which is the wealth per person) is a very poor measure for the overall size of the economy.
This is akin to saying a SV silicon valley engineer who makes $250k a year should be able to pay his $2 million mortgage when he all of a sudden gets hit with $300k in medical expenses because he got hit by a bus while riding his scooter without a helmet - fuck it, he's wealthy. He just needs to budget better.
This is not a great ratio. But it’s not unmanageable.
The GDP per capita implies there are tax raises and service cuts somewhere which would be feasible, alongside cutting debt and liabilities. Much of the population being in poverty is an inequality, not resource scarcity, argument.
Additionally, the costs of goods and services is much higher than in the states. GDP per capita doesn't measure purchase power parity, and your dollars in PR don't go nearly as far as they do in the USA. Energy costs, water costs, shipping costs, are all much higher in other countries, and legislation (such as the Jones Act) that helps mainland USA hurts PR.
PR is trapped, and has a perpetual brain drain of people escaping. It has a negative population growth of -2% a year (in a heavily Catholic country), and GDP growth has been negative for 13 years in a row. More austerity measures are not going to help the situation.
Puerto Rico’s PPP GDP per capita has been stagnant since 2006 or so, but that’s true of Italy and Spain as well. (Italy has done worse over the last 15 years than Puerto Rico.) Its not a great situation, but doesn’t justify treating it like some developing nation.
As to the damages—a lot of the $100 billion in damages is lost income which is already reflected in lower GDP. Other parts are covered by insurance. Tens of billions more will be covered by Congressional aid.
After learning about the scheming that occurred, I'm not so sure I'm not in favor of just wiping out that debt and making the financial institutions eat it.
[0]https://www.npr.org/2018/05/02/607032585/how-puerto-ricos-de... edit: forgot the link
a) I don't see anything in the article that implies the debt packages were particularly complex or manipulative.
b) Even if they were, are you saying that the state of Puerto Rico was not competent to evaluate it's own financial decisions?
Due to the complexities of Puerto Rico's status as a commonwealth (i.e. not a State) the island is unable to declare bankruptcy. If they could then this issue could easily be solved and would give the government some leverage as is the case in most cases involving financial institutions taking advantage of these loans like was the case in Detroit and NYC.
To quote the wikipedia article on the topic [1]:
"Puerto Rico or any of its political subdivisions and agencies cannot file for debt relief under Chapter 9, Title 11, United States Code because it applies only to municipalities on the mainland.[55"]
[1]https://en.wikipedia.org/wiki/Puerto_Rican_government-debt_c...
Having lived in PR my most of life and most of my family being lawyers in both the Federal and the local Supreme Court the insight I get from the situation is that unless the White House gets involved or Congress simply amends that single line in the bankruptcy law then the government has really no leverage and these financial institutions (not lenders, but banks who bought the debt from lenders) will get mostly what they want and cripple the island.
Was Puerto Rico unaware of this when they took out the loans? Was the law changed out from under them after they had made these deals?
If not, why should we care?
The fact that it went to the Supreme Court of the US [1] means that it is unprecedented and required the highest court in the land to interpret the law means that no parties were fully aware of how Bankruptcy would hold.
Puerto Rico's problem is that it is neither fish nor fowl, neither a city which has a legal escape route through bankruptcy nor a state which has a sovereign escape route.
Many would argue there is something inherently wrong (evil) with any interest bearing debt. Moving past that...yes, there is something wrong with reselling bad debt (maybe even reselling good debt).
The only reason people buy bad debt is they have bad intentions, either they are trying to resell it themselves to a less savvy buyer (usually employing various means of fraud and misrepresentation) - even the biggest banks in the world engaged in this with their toxic loans - or they plan to employ unlawful collection methods.
If you are an original creditor and you are going to resell a debt for pennies on the dollar, the at a minimum the debtor should have an option to buy out their own debt for the same price as a 3rd party.
I know the original creditors would object, but as someone who seems to support the current system of buying/selling bad debt to 3rd party collection agencies would you object to the creditor having to give the original debtor an option to buyout their own debt at the same price offered by a 3rd party collection agency?
These same investors also knew that there was a real possibility that Congress and the President could change the law at any time — which is very much part of “the legal regime” they should have considered when investing.
[1] http://penelope.uchicago.edu/Thayer/E/Roman/Texts/Sallust/Be...
The problem is deferring payment far into the future where the people deferring the payment won't have to deal with it, and the people in the future have to now sort out how to allocate the limited resources which were already promised years and decades in the past. There is no solution other than various parties getting all of what they were "promised", so everyone has to fight to get what they can.
Yes there is. It’s bankruptcy. What Puerto Rico is doing.
Bankruptcy means poofing promises. Whose promises get poofed in what quantity is the question. Broadly speaking, the constituents are taxpayers, creditors (mostly lenders and pensioners) and service recipients. Austerity puts the bulk of the pain on taxes and services. Going Argentina puts it mostly on external creditors. In between are reasonable paths.
Amazing. I want to bet in shit games like roulette, inevitably lose my money, then sue the casino and get it back.
Fucking parasites. A we know the only way to deal with these people. It's clear that "peaceful protests" can simply be ignored.
If they could then these financial institutions would be unable to raid the island's coffers.
>In June 2016, President Obama signed the law that allowed Puerto Rico to declare bankruptcy: The Puerto Rico Oversight, Management and Economic Stability Act
So while I can’t blame both sides, I am getting tired of the government being in bed with Wall Street, this isn’t “capitalism”. This is called crony capitalism.
So... loan money to a terrible customer knowing the risks? Take it on the chin and call it a day.
Kinda hard for anyone to argue that racking up a credit card bill makes you a massive victim. Or perhaps in this case, your best buddy racks up a credit card bill while you hang out with him partying. Maybe you should help him pay back some of the spending you pushed him to take on.