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Puerto Rico is the home address for both THE UNITED STATES, INC and the IRS. Its Chapter 9 bankruptcy filing on May 3, 2017 might have huge legal implications for modern Babylon. The territory essentially defaulted on $74 billion of debt a year earlier. However, the courts gave Puerto Rico a year in which to come up with the money or a plan. Of this, $13 billion is in subprime mortgages. The rest is in high-interest rate bonds.
The government refused to bail out Puerto Rico, partly because of the enormous amount of debt, and partly because if they did, they would have to do the same for all of the other bankrupt states like Michigan, Illinois, and California. So nothing happened in the past year, and finally, bankruptcy was filed on May 3.
But May 3, 2017 marked the beginning of a new era for the island…
The government of Puerto Rico’s day of reckoning had been delayed for a year after it first began defaulting on paying back its credit because of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which President Obama signed into law on June 29, 2016. From that time, the territorial government had until May 1, 2017 to negotiate settlements with its creditors, primarily hedge and pension funds, who had been enticed to loan money to Puerto Rico because of high interest rates and the territorial government’s constitutional guarantee to pay back money it borrowed.
When that deadline passed without deals to either settle the claims of its creditors or sufficient tax revenue to make payments on its debt, the future of Puerto Rico in US bankruptcy court was all but assured, as the PROMESA law made it possible for the first time for a US territory or state to file for bankruptcy protection from its creditors.
The article above then speculates on which state will be next.
With filing for bankruptcy now an option and Puerto Rico taking the lead in setting the legal precedents for the equivalent of state-level governments, there’s some interesting speculation on which US state might be the next to seriously pursue the option. Analyst Mike Shedlock makes the case for Illinois to be next, given that state’s completely dysfunctional legislature combined with its enormous public employee pension liabilities.
Even so, $74 billion in bond-debt is not the full story. Puerto Rico also has another $24 billion in unfunded pension liabilities. Here a short video by Peter Schiff that analyses the situation.
There are many hedge funds, mutual funds, and banks that hold Puerto Rico’s bonds, because Congress made them tax-free. Then when the Federal Reserve lowered interest rates to virtual zero, many turned to Puerto Rico’s bonds in the search for a greater return on investment. A default was hardly considered, because Puerto Rico’s constitution forbids it to default on its debt! The problem is that this constitutional requirement does not put any money into its coffers, nor does it give them the ability to pay off debt. If anything, it only made it necessary to get a bailout from the US Congress. But Congress has refused to do this in the past year.
When this bankruptcy is finally settled by the courts, they will find themselves losing millions and billions of dollars. There is little doubt that some of these companies will experience serious losses. So a chain reaction is likely later this year and next.
It is not yet clear how this bankruptcy will affect other things in the future, but because this is 2017, it probably is part of the general overthrow of Babylon that should begin by the end of this year. How big a role it will take depends on the decision of the bankruptcy court. But since Puerto Rico has no money to pay off its debts, and it is not likely that Congress will bail them out, the biggest losers will be those who hold the bonds, as well as the pensioners.
If Congress changes its mind and bails them out, then we can expect to see all the states bailed out, one by one. Such bailouts would greatly increase the US debt and reward the Socialist policies of the states and territories. That could be hyper-inflationary. So be watchful to see what happens.