It has been characteristic about the Great Recession that so relatively few countries have defaulted given the scale of the financial distress and the slump in economic activity. But it now seems to be changing. Greece this weekend moved dramatically closer to a sovereign default and the Ukrainian government has signaled that it could effectively default in July.
And now this from the commonwealth of Puerto Rico (from the New York Times):
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.”
…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.
He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.
…With some creditors, the restructuring process is already underway. Late last week, Puerto Rico officials and creditors of the island’s electric power authority were close to a deal that would avoid a default on a $416 million payment due on Wednesday.
…“My administration is doing everything not to default,” Mr. García Padilla said. “But we have to make the economy grow,” he added. “If not, we will be in a death spiral.”
A proposed debt exchange, where creditors would replace their current debt with new bonds with terms more favorable to Puerto Rico, signals a significant shift for Mr. García Padilla, a member of the Popular Democratic Party, who was elected in 2012.
…He said that when he took office, he tried to balance the fiscal situation through austerity measures and fresh borrowing. But he saw that the island was caught in a vicious circle where it borrowed to balance the budget, raised the debt and had an even bigger budget deficit the next year.
…“There is no U.S. precedent for anything of this scale or scope,” according to the report, one of whose writers was Anne O. Krueger, a former chief economist at the World Bank and currently a research professor at the School of Advanced International Studies at Johns Hopkins University.
…Some officials and advisers say Congress needs to go further and permit Puerto Rico’s central government to file for bankruptcy — or risk chaos.
It is hard to miss the similarities between Puerto Rico and Greece, while Greece is a independent country Puerto Rico is a commonwealth within the USA, but both share the fact that they are part of a bigger currency union.
So if we wanted to formulate a theory of default we might want to bring in two elements – an in-optimal currency union (and too tight monetary policy for some members of the union) and serious moral hazard problems due to the perceived high likelihood of a bail-out by the big brother – the US government in the case of Puerto Rico and the European taxpayers in the case of Greece.
PS Ukraine and Venezuela are also on the path to default, but that I believe are quite different stories.
PPS What do we call it if Puerto Rico gives up the US dollar? Puerto Ricixt?