The US’s Puerto Rican brain freeze is finally thawing

John Dizard

The pattern of a deal on the island’s muni bonds is now visible, says John Dizard

098a74d0-5693-4e9c-80f7-3baab6f4b351The US political system’s Puerto Rican brain freeze is finally thawing. The “tell” from the municipal bond market was not in a rise in the prices of the commonwealth’s bonds, which did not change that much, but in the gradual resumption of trading.

Starting the morning after the Senate Republicans published their 159-page Puerto Rico Assistance Act of 2015, Commonwealth general obligation bonds began to be bought and sold in multimillion-dollar lots, rather than the pocket-change amounts that had been exchanged earlier this month.

This is not to say that there will be a law passed through both houses of Congress and signed by the president before the end of the year. The Congressional Democrats will want any Puerto Rican deal to insert some language with their party’s watermark.

The White House will want to take some credit, as well as the arrangement of the signing ceremony. The pattern of a deal, though, is now visible, described in tortuous legislative terms.
The Republican senators involved in writing the proposed law are the madmen beloved by camera operators and talk-show hosts. These are grey, muddy workhorses such as Orrin Hatch, Chuck Grassley and Lisa Murkowski.

They will make way for Democratic colleagues who will demand the credit for compromises, and for House Republicans who will stand up for their chamber’s honour.
I have gone over the Senate bill, reading some parts and scanning others. Much of it concerns detailing actuarial assumptions for calculating pensions (a breakthrough for Puerto Rico), and the rather sweeping information collecting powers that are proposed for a “Puerto Rico Financial Responsibility and Management Assistance Authority”.

You (and your lawyer) would call this thing an official receiver for the commonwealth. Of course the senators, who are not competing for airtime with Donald Trump, the US presidential candidate, collectively say: “No, no, no . . . of course not.”

As Senator Murkowski says, in part of the Finance Committee’s joint statement: “The bill strikes an appropriate balance between respecting Puerto Rico’s sovereignty and providing a firm backstop to ensure the necessary financial reforms are implemented.”

Oh, of course, Puerto Rico’s sovereignty, or, as the joint statement also mentions, its “autonomy”.
That’s interesting, because on page 150, line 9, section 362, the law says: “This title (the bill) pre-empts all Federal, State, and local laws relating to the Commonwealth, any public corporation, or any process for establishing or reviewing rates, fees, taxes, or other charges.”

Now to my untrained eye, that sounds as though Puerto Rico is without doubt subject entirely to the authority of the federal government, as in Congress and the president.

This is where those euro think-tank crews are rotating their turrets in vain. Puerto Rico is not Greece. The IMF has nothing to do with Puerto Rico, and there are no real lessons for the euro area or international debt restructuring.

The old troika of the European Commission, the International Monetary Fund and the European Central Bank that tried to supervise Greece had to wait in its hotel rooms for paper copies of Greek budget data to be delivered to them.

The proposed law’s “authority” gets to live inside the Puerto Rican government, and can use courts to get answers throughout the US.

On the other hand, even though they are Republicans, and make sure we understand that this is not a “bailout”, there is $3bn for Puerto Rico and some social security tax relief for the island’s workers.
The good news for Democrats is that an amended version of this law will get the problem off everyone’s campaign agenda for next year. No Caribbean island terrified by Jurassic Park-like rampaging monsters.
Later, when the authority is really, really mean to some Puerto Rican politicians, they can blame those Republicans who insisted on such inflexible provisions before they would give milk to infants.

Speaking of being eaten by monsters, did I mention the municipal bond insurance companies? There can be little doubt that they will be the biggest losers here, but then their stock prices and intransigent negotiating positions would have told you that already.

The commonwealth bondholders whose principal and interest payments they have guaranteed will get paid in the end, but the holding companies for the insurers will have their ability to write new business restricted by the losses.

Contrary to the standard “narrative” about Puerto Rico, the hedge funds involved with Puerto Rico will be relieved to take a haircut and settle with the authority or anyone else. This was not a place for them to make a lot of money by directing a restructuring.

Some bond people think the Supreme Court’s liberals will seek to uphold the powers of the commonwealth. I doubt it. The real “liberal” position would be to rule that it is up to Congress to fix the problems of this colonial possession.

Eventually, Puerto Rico will be successfully restructured, with bond haircuts and better administration. Then it will probably be welcomed as a state. This supposed intermediate status as a “commonwealth” has created far too much moral hazard.

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