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Tuesday, 30 June 2015

Puerto Rico (USA) versus Greece (EUR): 1-1

Last week, the island of Puerto Rico announced that it cannot repay its debt. The magnitude of their problem is, however, mind blowing. Puerto Rico, an island of 3.7 million people, has a total debt of 72 billion dollar which translates in some 19,500 dollar per person. Puerto Rico even has more debt per person than any other American state. Puerto Rico’s bonds have a face value roughly eight times that of Detroit’s bonds (NYT). The city of Detroit filed for Chapter 9 bankruptcy on July 18, 2013.

The island of Greece has an average debt per person of some Euro 28,000, based on a total debt of Euro 320 billion divided by 11.5 million people (also see June 15 blog). According to Bloomberg the Greeks rank #12 worldwide in government debt per person, being $35,881 in 2014. Greece ranks even higher than The Netherlands (#13) and Germany (#14). Also see my March 13 blog. 

Greece is an independent country that is part of the eurozone. Puerto Rico is U.S. territory and part of the dollar zone. A Puerto Rican bankruptcy would be even more complicated than a Greek one, as Puerto Rico would first need to become independent from the USA before it could even go bankrupt. 

Greek debt is predominantly held by the countries like France and Germany. Puerto Rican debt is mainly held by U.S. mainland investors. These U.S. investors recently proposed to further increase the existing loans which would then allow Puerto Rico to meet its required current payment obligations but which would also increase the future debt problem. It's like a Ponzi / Madoff scheme: new debt redeems old debt while total debt grows due to high (junk bond) interest levels. 

From a geo-political perspective, Greece is more interesting than Puerto Rico. The importance of the Bosporus and Dardanelles Straits and the Russian Black Sea Fleet was explained in my June 6 blog. The former Ramey Air Force Base in Aguadilla (Puerto Rico) has been closed for decades, and no other Air Force Bases or Naval Air Stations remain. (Wikipedia)

The root problems for both islands are quite similar. Greece: "the failures of the political classes that have misruled the nation since the return of democracy in 1974, the chronic clientelism and corruption of the state, the selfishness of its business oligarchies" (FT). Puerto Rico: "since 2006, the economy has contracted every year but one. Its unemployment rate of 13.7 percent is double that of the U.S. mainland; its poverty rate is twice that of Mississippi. Meanwhile, Puerto Rico's population and tax base have aged and shrunk. Since 2000, public debt has risen from 60 percent of gross domestic product to more than 100 percent. Much of that has been racked up by the island's inefficient public-sector corporations" (Bloomberg). 

For several months, the USA urged Europe to write off Greek debt. Ironically, this proposal is now used by Puerto Rico (USA) to its U.S. investors. 

Some interesting sayings on debt:
- The only man who sticks closer to you in adversity than a friend is a creditor. (author unknown) 
- Promises make debt, and debt makes promises. (Dutch proverb)
- Today, there are three kinds of people: the have's, the have-not's, and the have-not-paid-for-what-they-have's. (Earl Wilson)