While Greece may be "contained" for the time being, the only reason why its creditors were eager to collaborate on an expedited basis with the humiliated Syriza government is because as we noted earlier, of the €7.1 billion bridge loan released to Greece €6.8 billion would promptly be used to repay Greece's creditors including the ECB for whom an event of default would be unthinkable unlike the IMF.
The sad part, as we laid out in "The Unspoken Tragedy In The Upcoming Greek Bailout [9]" is that both with the bridge loan(s) and the actual €86 billion (or more) EFSF bailout still to come, the vast majority of funds will be used to repay creditors, and even that wouldn't be sufficient hence the need to put €50 billion in Greek assets in escrow as a repayment pledge for all incremental overages.
Said otherwise, very little if anything from Europe's generous third bailout would actually reach the Greek people yet again (and quite likely there would be a funding deficiency hence the need to sell assets).
Compare that to the position taken by Puerto Rico today, when its budget director said the commonwealth won’t redirect cash from its operating budget to make debt payments, in the process "ratcheting up the pressure to restructure the island’s $72 billion debt burden" as Bloomberg reports [10].
The comments from Luis Cruz, director of the Office of Management and Budget, come as Standard & Poor’s slashed its rating on the Public Finance Corp.’s bonds to CC from CCC-, calling an Aug. 1 default on the securities a “virtual certainty.”
Puerto Rico has $36.3 million of Public Finance Corp. debt maturing Aug. 1 that needs to be repaid through legislative appropriation and as previously reported, Puerto Rico said last week the agency failed to transfer $36.3 million to a trustee to cover the Aug. 1 debt payment because the legislature didn’t appropriate the funds.
The junk-rated island must first pay health, security and education expenses, Luis Cruz, director of the Office of Management and Budget, said during a press conference Monday in San Juan.
“It is the government’s priority to provide public services and we will not be transferring funds from these assignments to pay the debt,” Cruz said.
"We all know the difficult situation we are facing in terms of cash flow,” Cruz added, "And we have to decide how we handle that cash flow and our priority is to provide services to citizens: health, safety, education."
Bloomberg adds that last month the island's legislators approved a budget for the fiscal year that began July 1 that doesn’t include $93.7 million to repay debt-service costs on PFC bonds. "The legislature did create a fund that the Government Development Bank can use to repay debt. The bank, which handles the island’s borrowing deals, must ask the legislature before it can access that money. The legislature doesn’t reconvene again until mid-August, after the bonds mature. Governor Alejandro Garcia Padilla doesn’t plan to call a special legislative session to bring lawmakers back earlier to discuss the Aug. 1 payment, Cruz said."
David Hitchcock, a S&P analyst in New York, wrote that "A default on the PFC bonds would be further demonstration of increasing unwillingness to pay debt in full and also raises the potential for future unequal treatment between various types of bondholders."
And while it would be easy to say that Puerto Rico and Greece are comparable, the reality is that unlike the soon to be default island, Greece truly did have, and still has, a gun to its head, as a result of its unwillingness to prepare for the Plan B it itself was eager to escalate to, namely existing in a world without the financial backing of the ECB which it found the hard way, means capital controls, bank runs, and a paralyzed financial system.
Which is why Puerto Rico is lucky that its creditors are largely inert entities - mostly municipal funds and a few activist hedge funds - who have no leverage over the island. Which is why PR can default on them without fear of retaliation - surely the US will never throw the commonwealth out of the Dollarzone, whether permanently or "temporarily", and why Greece can only stand and watch as two case studies emerge: one of an insolvent state which can at least prioritize its own population over the demands of foreign creditors, and another insolvent state, whose creditors can take advantage of the European monetary "union" which for Greece is now a prison, and set any and every demand they want, knowing full well they can crush the local economy all over again with just one ELA-limiting press release.
In this regard, it is quite clear that Schauble was joking when he offered to trade Greece, which has zero leverage over its creditors (at least until it implements plans for existence outside of the Eurozone) for Puerto Rico, whose creditors have zero leverage over the island.
Finally, we hope the Greek government is watching and learning, and taking appropriate measures so that it too can, at least once, prioritize its own people's needs over those of a global banking oligarchy.
