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Wednesday, July 1, 2015

debt and financial crisis of Greece and Puerto Rico

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.

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