I read last night that a bunch of wealthy folks are in a stiff battle with Puerto Rico to prevent the country from declaring bankruptcy. And it sounds like the wealthy folks are predominantly hedge fund managers trying to protect there 20% return.
I have to admit that my first instinct was to vilify the hedge fund managers but the truth is I don’t know much about how Puerto Rico got into the state they are in. I need a little more background and so far nothing really has told me anything.
I do remember the economist Paul Krugman doing a post outlining that Puerto Rico does not appear to have much economic advantage other than maybe tourism: they don’t own any great natural resources to exploit (other than maybe beaches), they don’t have cheap enough labor to ride the outsourcing craze, and they are not located close enough to any major economic centers to take advantage of the “closeness” factor to overcome shipping costs. He couldn’t find any economic distinction that would help the country rise out of the economic malaise.
So what happened is that for young folks, the opportunities lies abroad and so they have left the country, leaving the old and the “not-so-talented” behind. This emigration of youth leads to a reduction (crash?) in tax receipts so the government is faced with the necessity of cutting services, possibility at a time when there is a growing need for such services. With not enough money for delivering services but facing growing needs, the government turned to borrowing.
My first thought in regards to the hedge fund managers, is why did they lend money to Puerto Rico, especially at a usurious rate of 20%, when it appears that the country has no real good way of paying back? Aren’t they supposed to be masters of finance? Or were they lured by the fact that the country has outlawed the bankruptcy option? Did they think: “We can lend them money at 20%, pull out that money, and they can’t declare bankruptcy. There is no way we can fail to get our money back and more. It’s guaranteed.”
But, Puerto Rico did turn to the hedge fund managers, begging for money. First rule: do not turn to hedge fund managers or private equity firms – they are not there to help you. They are there to pull money out of you – “make money for their shareholders”.
I wonder what story Puerto Rico used to convince the hedge fund managers that they could pay back the money? What was their selling point? Or was it only the lack of bankruptcy option that pulled in the hedge fund managers?
At this point, I don’t know, so I have to say hedge fund managers can’t take all of the blame. Puerto Rico is going to have to take some of the blame. But I do think that the country is in such dire straits that the investors are going to have to take a haircut. I don’t see how a county that has no real good economic prospects in the near future, being able to repay. It’s like squeezing blood out of stone – there is no blood in stone. What do the hedge funds want to do? Have the populace die from inability to pay for food so they can take over the island?