Their Greece, And Now Ours

"You mean, you were serious?"

You can just hear Greek Prime Minister Alexis Tsipras asking the European Central Bank that question after the ECB called his bluff and refused to advance Greek banks any more emergency funds, forcing them to close for at least a week and the Athens stock market to also suspend trading. Needless to say, Greece will default on a $1.7 billion debt payment to the International Monetary Fund that comes due June 30.

Until the ECB finally learned how to say No (or, in this case, Nein) over the weekend, Tsipras was confident that his following the J. Paul Getty school of financial negotiating ("If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem") would work and that the ECB and its fellow official creditors to Greece would eventually knuckle under to his anti-austerity demands and continue to kick the can down the road yet again.

The European financial markets certainly sided with Tsipras last week, driving the major equity indexes to their best gains in over a month and German bund rates to their highest levels in two weeks in anticipation of a deal. But, as it turns out, if you owe 380 billion euros (about $340 billion) you really do have a problem, and a humungous one, and you better play ball if you want to get more.

On the Monday following Greece's most critical weekend in decades, the European markets got jolted back into reality, with stocks dropping sharply and ultra-safe German bund prices climbing.

What follows next is a little unclear. Over the weekend, IMF Managing Director Christine Lagarde said the agency, under its rules, will be unable to providing additional funding to Athens until it clears up its overdue debts. Another $7.6 billion is due to the ECB next month and in August.

Then there is next Sunday's referendum, in which Greek voters will be asked to approve or reject its creditors' demands for austerity. Whichever way the Greeks vote – and according to some polls they will approve the measures in order to stay in the eurozone – it's doubtful that their lenders will care.

As Lagarde said, the vote by then may be irrelevant. "I can't speak for the IMF program, but the European financial arrangement expires June 30," she told the BBC. "So, at least legally speaking, the referendum will relate to proposals and arrangements that are no longer valid."

In Greece itself, it would appear that the Tsipras government is toast, especially if his own citizens agree to accept the proposals he is urging them to reject. What is clear is that many of Greece's stronger currency partners – remember, Greece represents just 3% of the eurozone by population – have finally reached their limit and will be glad to see Athens leave. So it looks like Greece might be out of the euro zone, whether it wants to go or not.

Now we have our own version of Greece.

The governor of Puerto Rico, Alejandro Garcia Padilla, said over the weekend that the commonwealth can't pay its roughly $72 billion in outstanding debt – chump change by Greek standards, but more than any U.S. state on a per capita basis.

"The debt is not payable," he told the New York Times. He wants the island's creditors to grant major concessions, including deferring some debt payments. As a commonwealth, Puerto Rico does not have the option of filing for bankruptcy, like Detroit and Stockton, CA, have done.

Many of those creditors including mom and pop investors, either directly or in municipal bond funds, lots of them in New York City, where Puerto Rican debt is exempt from city and state income taxes, in addition to federal taxes.

That triple tax-exempt status – and implied guarantee that Washington would never allow Puerto Rico to default – has enabled the Commonwealth to sell billions of dollars of bonds over the years. Most of that debt is in the form of general obligation bonds, which require the island to repay first before it pays anything else. But billions of dollars were also sold by public corporations and agencies, including electric power, road and water and sewer authorities.

The population of Puerto Rico is about 3.6 million, or about 1% of the 320 million for the U.S. as a whole. That's an even smaller percentage than Greece's portion of the eurozone. So Puerto Rico's problems pale in comparison to Greece's.

Nevertheless, the lesson is the same. Continuing to funnel money to people who can't or won’t pay it back is never good public policy. Nor is it fair to the people who put up the money in good faith and expect to be paid back on time.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.