How Governments React to Bankruptcy

23 Feb

[courtesy Google Images]

[courtesy Google Images]

Michael Snyder ( wrote:


“The crisis in Puerto Rico continues to spiral out of control.”


Maybe so, but I don’t regard Puerto Rico’s plight as big news. I don’t see Puerto Rico as being the domino that starts the chain reaction that eventually, topples the U.S. economy.

Even so, Puerto Rico’s reaction to its default is interesting as an indicator of what may happen to the US when the U.S. government also inevitably defaults on its debts.

•  According to Michael Snyder, “The following is an excerpt from a letter that Treasury Secretary Jack Lew sent to Congress:”


“Although there are many ways this crisis could escalate further, it is clear that Puerto Rico is already in the midst of an economic collapse. . . . Puerto Rico is already in default.”

P.R. isn’t paying its existing debts.


“1.  It is shifting funds from one creditor to pay another . . . .”


P.R. is robbing Peter to pay a more politically-connected Paul; the political favorites who are “too chummy to fail” will be paid as long as possible.


And P.R. has,


“2.   Stopped payment altogether on several of its debts.”


Those who are mere investors and not particularly chummy with government are already losing the cash owed to them.


“3.  Creditors are filing lawsuits.”


The creditors who sue P.R. better pack a Snickers bar because they’re going to be in court for a long time before they ever get paid.  In the end, they’ll probably receive only a relatively small percentage of the debt due (take a “haircut”).

P.R. creditors have no more chance of collecting all of the money owed them than do the creditors who loaned money to Greece.  What can’t be paid, won’t be paid.


•  Puerto Rico’s Government Development Bank, which provides critical banking and fiscal services to the central government, only avoided depleting its liquidity [exhausting its supply of cash and becoming openly insolvent] by:


“1.   Halting lending,”


The Puerto Rican “Government Development Bank” didn’t actually “halt lending” by choice.  They ran out of cash.  The P.R. “Government Development Bank” is broke.



“2.  Sweeping in additional deposits from other Puerto Rico governmental entities.”

So far, it’s easier for P.R.’s territorial government to rob the city and county municipal accounts than it is to rob the Puerto Rican people.  But, you can bet that as soon as the municipal accounts are exhausted, the Puerto Rican government will start to rob the people’s savings accounts and other bastions of private savings.


•  In broad strokes the official Puerto Rican reaction to their government’s defaults has been to:


Rob its creditors by stopping payment on debts due. There aren’t many creditors and nobody likes ‘em anyway because they’re rich.  Governments can rob rich creditors without causing much adverse political reaction.

Rob smaller governmental agencies and entities. Nobody likes government, either. Therefore, robbing cities and counties will create only a little more political heat than robbing rich creditors, but not as much as will be created when the government robs the people.

Ignore the resulting lawsuits since most are filed by creditors without political clout and they’ll take years to settle.

Rob the ever-dangerous and unpredictable Puerto Rican people (but only as a last resort)—and hope they don’t riot and burn the island down to the water line and/or hang the government officials.


•  Implication? Faced with bankruptcy, most governments (including that of the United States) will first rob those with the least political clout (rich creditors), then rob those with some political clout (smaller governmental entities) and only as a last resort, risk robbing the people who have the most political clout and just might riot.

There’s a good chance that when the US defaults—as it must since the National Debt can’t be paid in full or even substantially—we’ll go through a very similar set of steps:  1st, rob its rich creditors; 2nd, rob smaller governmental savings accounts, and finally, 3rd, rob the American people of their savings.

Repaying the debt is all about politics.

If you’re a creditor and politically connected, you might get paid.

If you lend money to the government, but you’re not politically connected, the probability that you’ll be robbed by the government is high.


Posted by on February 23, 2016 in Bankruptcy, Debt, What Can't be Paid


Tags: , , ,

7 responses to “How Governments React to Bankruptcy

  1. palani

    February 23, 2016 at 5:47 AM

    Puerto Rico actually is federal territory. No federal entity (includes the District of Columbia) is able to take advantage of constitutional privileges of a uniform system of bankruptcy. Puerto Rico’s situation and the Districts situation are identical … they are the same entity. Congress proposing to ‘bail out’ Puerto Rico is congress proposing to bail out congress.

    Should you visit the island a good suggestion is to travel to Borinquen (the Island) and avoid Puerto Rico like VD, the Plague and herpes. Puerto Rico is a Spanish overlay while Borinquen is the original Taíno name Borikén. Borinquen is located in the less financially strapped plane.


      February 23, 2016 at 7:21 AM

      Always very illuminating, as usual. Do you have a website/radio prog? If not, you should!

  2. Adask

    February 23, 2016 at 11:04 AM

    I co-host a 1-hour radio show five days a week called Financial Survival that you can listen to at The program airs live from 3PM to 4PM central time. That program tends to deal with economic and political issues

    I also co-host a 2-hour radio show on Tuesday nights called The American Independence Hour. It broadcasts live from 8PM to 10PM at This program deals primarily with law and political events.

  3. Lyndon

    February 23, 2016 at 1:32 PM

    The only solution to the world wide debt crisis is debt forgiveness. What does not exist or never existed can not be returned. Simple.

  4. Adask

    February 23, 2016 at 2:13 PM

    Actually, it’s not that simple. In our modern debt-based monetary system, one man’s debt is another man’s ASSET. When forgive the debt we also destroy the correlative paper debt-instrument (like a US Bond). Thus, to “simply” cancel the $19 trillion National Debt means we must also cancel $19 trillion in US Bonds that are currently being used as a store of wealth by some people and/or as collateral in banks for loans. If we suddenly/simply wipe out $19 trillion in paper assets, where will be find the paper “capital” needed to provide loans for the next factory, shopping center, or consumer loan?

    We can’t cancel $19 trillion in DEBT without also canceling $19 trillion in paper “CAPITAL”.

    By embracing the debt-based monetary system, we mounted a tiger that we can’t dismount without being eaten up.

    • Lyndon

      February 23, 2016 at 7:00 PM

      I don’t accept that theory.

      Debt forgiveness has been done for centuries. Most recently in Iceland and Argentina. I never wrote ALL the debt had to be forgiven, erased essentially, but a large amount can and must be and WILL be because it will not be cancelled by payment.

      Much of the 19 trillion is interest which was never “loaned” and it compounds over the decades. If I borrowed your car, all I can give back to you is your car -not another one just like it because you say so or even if I agreed to.

  5. timmy

    February 23, 2016 at 7:49 PM

    wondering what will happen to all the us companies and hedge funder 1 per centers and others who relocated there under the very generous us federal income tax exemption program…


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