Michael Kevane

From Reorg Research.

As a heavily levered U.S. Territory, Puerto Rico has nearly $70 billion worth of debt to which numerous U.S. and foreign financial institutions have heavy exposure. Tangentially connected banks and companies too have suffered from the current economic turmoil pervading the territory, as the territory’s municipal debt has been downgraded to near-junk and has been in a continuous spiral throughout the year. The duress has driven up the cost of debt and stoked concerns about Puerto Rico’s future access to capital markets – factors that have caught the attention of an increasing number of distressed investors and funds.

Given that the municipalities of a U.S. territory cannot file for chapter 9 protection – the specifics of which Reorg Research outlined earlier – the type of workout or restructuring for the region is uncertain if it reaches the point at which it simply cannot meet its obligations.

Puerto Rico Governor Garcia Padilla, who took office in January, has been taking urgent measures to put off what many market participants see as an impending crisis: In a presentation regarding the 2014 budget, the Puerto Rican government has suggested several initiatives in an attempt to balance the budget over the next two years, which mentioned the recent measures of overhauling the territory’s pension system, raising utility rates, and passing new tax measures.

Currently, 34% of Puerto Rico’s public debt pertains to the general fund and the remainder with public corporations, sales tax debt and municipalities. Separate from outstanding debt, the country also has a significant amount of underfunded pension liabilities. As of September, the public pension fund liabilities amounted to approximately $33 billion with only $4 billion of assets to cover such obligations.

Puerto Rico’s securities meanwhile have failed to keep pace with the broader U.S. muni market. For one, Puerto Rico’s $632 million in 5% general obligation bonds due 2041 traded at 61.83 today the $459.3 million 5.5% notes due in 2039 last traded at 68.5, according to trade data, down from the 90s and par, respectively, as late as June.

See more Breakdown of Puerto Rico Cap Structure on Reorg Research

NPR’s book reviewer Roscrans Baldwin (huh?  is that a great name or what for a book critic?) talked about this book early September, so when it arrived in libraries I requested it.  I’m more than halfway through and it lives up to expectations: the sentences and paragraph structure are so remarkably different from straightforward narrative, that you wish you were a college student and not a college professor (because then you could write a paper about the book instead of grading 100 econ midterms… they’re fun too but the sentence structures, well, enough said).  Duplex is a formidable short novel.  From the acknowledgments it appears to have been formed as a set of vignettes.  They are interrelated.  Time, characters, everything is in flux.  On first read it is very difficult to follow.  (Especially when reading one chapter each night.)  But I get the feeling that if I spend more time with it, there is lots underneath.  For me it is rare that I read books that while reading I say to myself, I am going to read this again more slowly.  Of course, I haven’t finished the first read, so who knows, maybe there will be a large alien-meteorite  on an ice-packed island that explains everything at the end (Smilla’s Sense of Snow, anyone?)

I enjoyed (well, if that is the word) reading Purple Hibiscus and Half of a Yellow Sun, and would heartily recommend them.  But it seems that Adichie has decided to pursue some fast money, with an obvious novel and lecture circuit about “being black”… it’s the whole “start a conversation” thing all over again.  Platitude after platitude… Adichie in the interview with Gross at one point even says, “what they should walk away from the table with…” as if blacks and whites in the U.S. were like negotiators at a nuclear arms treaty… I have a very healthy loathing for identity novels…. I think over-obsession with identity issues is fundamentally misplaced.  It’s like going to a doctor and talking for hours about difficulty sleeping and never mentioning oh by the way a lump in my breast. And because so many people are cognitively biased this way, a lot of identity-vultures fly around saying, “give me your money and I’ll give you an identity chucklenod”  (yes I coined that, the chucklenod is when you read something and nod, emit a little chuckle, and say “yup” and then the author repeats it over and over… see watermelon below).

Terry Gross, normally a sensitive and intelligent interviewer, plays the role of parochial and know-nothing white American to a tee… her lowest moment when she spend 5 interminable minutes with Adichie about her hair, wondering about why an African woman might want straight hair!  Could you imagine her having that conversation with Wole Soyinka? Well, maybe I can.

When the novelist Chimamanda Ngozi Adichie was growing up in Nigeria she was not used to being identified by the color of her skin. That changed when she arrived in the United States for college. As a black African in America, Adichie was suddenly confronted with what it meant to be a person of color in the United States. Race as an idea became something that she had to navigate and learn.

The learning process took some time and was episodic. Adichie recalls, for example, an undergraduate class in which the subject of watermelon came up. A student had said something about watermelon to an African-American classmate, who was offended by the comment.

\”I remember sitting there thinking, \’But what\’s so bad about watermelons? Because I quite like watermelons,\’ \” Adichie tells Fresh Air\’s Terry Gross.

via ‘Americanah’ Author Explains ‘Learning’ To Be Black In The U.S. : NPR.

Interest rates skyrocket and there are numerous collateral calls from clearinghouses and thus a squeeze on Treasuries. Everyone is scrambling after Treasuries and suddenly T-Bill liquidity is quite scarce. (Here is one FT post on collateral crunch.) The next morning retail runs on money market funds commence and most redemptions cannot be made (another FT post here). Those funds are shuttered and new commercial paper issues are put on hold.

By mid-morning of the 17th the payments system has shut down entirely. The Fed tries everything possible, but even with a flood of monetary liquidity, T-Bills are “not what they used to be” and no flow of reserves can make up for this. The monetary authority cannot become the fiscal authority in the span of an hour or a day, especially when it doesn’t have a fully credible fiscal authority behind it. The payments system remains gridlocked. Elsewhere, the Italian 10-year rate shoots over eleven percent, so the ECB has to invoke Outright Monetary Transactions, but the Germans get nervous and don’t go whole hog with this program. A lot of European credit markets shut down too.

Lots of countries have defaulted on debt.  Sometimes the debt owners take a haircut, more often they just have to wait.  In the United States there doesn’t appear to be danger of haircut, just of delays.  But the delay in payments could be very costly.  Much of the financial system relies on highly leveraged transactions being cleared every day.  A medium sized stone tossed carelessly in the pond might generate huge ripples.

via Marginal Revolution — Small steps toward a much better world..

The Republicans could have argued that government workers don’t do anything anyway so the shutdown is not even really costly, but they’ve apparently decided not to go that route.  Of course this eliminates a major constituency for a deal; now 90% of workers will want the shutdown to continue!

As the fifth day of the federal government shutdown began, members of the House came together in a moment of rare bipartisanship to pass a bill, by a vote of 407 to 0, approving back pay for furloughed government workers.  President Obama has expressed his support for the measure.  Senate Majority Leader Harry M. Reid supports the measure, but said Saturday that if furloughed workers are guaranteed back pay, there’s no reason to keep them out of work.

via House votes to approve back pay for furloughed workers.

Maybe there are some and I don’t know about it.  I confess that out here in solidly Democratic California partisan politics not too high on list of things to follow especially when research in on West Africa.  But I do distinctly remember when Jim Jeffords famously switched, and this shutdown debacle seems like the ideal time for Democratic oriented plutocrats to offer to set up think-tanks for slightly less-wacky Republicans to switch parties.  (I mean, that’s the presumable quid pro quo, other than committee assignments etc.)  I guess the local Democrats hoping to win the seat have to be convinced to give up their ambitions, but we all know Democratic Party members have no personal ambitions…  Just seems like a golden opportunity to get 5-10 to switch sides, and maybe it snowballs….  BTW, I am not at all knee-jerk anti-Republican, but bargaining by destruction to me is just not playing by the agreed-upon rules.

Amongst policy-oriented economists this matters a lot, because the V shape of the recession and recovery in 1991 means that this was either (2) an important exception to the usual “financial crises recessions are really bad” or (2) it is irrelevant since it was not a financial crisis recession.  My colleague Alex Field today presented a seminar (the paper is here) arguing that the relevant banking “crisis” of the period, the savings and loan debacle, was more of a salacious great story, and much less of a macroeconomic event of consequence.  So the 1991 recession had nothing to do with a financial crisis.

In the course of the seminar, Alex presented some output gap numbers (how much GDP has been “lost” relative to what could have been if there had been no crisis).  For 1991 this number was very small, maybe 15% of one year’s GDP.  For the 2007-ongoing recession, this number is likely to be very large, more like 130% of one year’s GDP, according to Alex, about half of what he calculates (roughly) for the Great Depression (~300% of on year’s GDP!).

New York Times officially declares San Jose a “metropolis”… soon we’ll have a caped super-hero just like the other ones.  But ours will fight pensions?

San Jose now spends one-fifth of its $1.1 billion general fund on pensions and retiree health care, and the amount keeps rising. To free up the money, services have been cut, libraries and community centers closed, the number of city workers trimmed, salaries reduced, and new facilities left unused for lack of staff. From potholes to home burglaries, the city’s problems are growing.

Some of our neighbors are city workers, and ten years ago they used to be very up-front: work 20 years and get health care benefits for life!  I have noticed that they are very, very quiet about their benefits now.  It is a super-charged topic.  This line from the article, by the way, has got to be complete BS, or he has a very sad story that has nothing to do with him being a police officer… terrible reporting.  Police officer salaries are upwards of $100,000, and they retire on something like 90% of salary.  With overtime they make like $200,000 (it’s all public record on the San Jose Mercury News website).  If he has a $600,000 mortgage, he is paying maybe $3,000 a month… The cuts proposed are fairly modest.  If he has to sell his house, something completely unrelated to salary and pension is going on.

“I have to sell my house,” Officer Steve Brownlee said as he directed city workers toward a pile of debris. The only alternative, he said, was to work endless overtime to make up the difference. “I’d rather lose my house than do that,” he said.

See whole story: Struggling, San Jose Tests a Way to Cut Benefits – NYTimes.com.