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Puerto Rico Races to Rescue Its Pension Fund

November 27, 2012 by Leave a Comment

Its economy is sputtering. Its population is shrinking. Its recent election is disputed. Its public pension fund is perilously low on cash. The American territory has just been through a brutal five-year recession, something not experienced in the United States as a whole since the 1930s.

Desperate to raise cash, Puerto Rican officials have been selling off anything they can: two toll roads and the main airport so far.

To bring in tax revenue, they are trying to lure people out of the underground economy. Coffee shops, hairdressers, even outdoor market stalls are being required to issue printed receipts with every sale. The receipts carry a lottery number, with a chance to win cars or cash, as an incentive to get shoppers to pay the island’s 7 percent sales tax.

Though many of Puerto Rico’s problems are reminiscent of Greece’s — tax noncompliance, a stagnant economy, years of issuing long-term debt to cover short-term payments — investors have had a nearly insatiable appetite for its bonds.

But now their support is dwindling. Some big investors are pruning their holdings. That is beginning to widen the cost of borrowing for Puerto Rico relative to other states and municipalities, which are benefiting from a big decline in borrowing costs. The interest rate its 30-year bonds now pay is about 2.5 percentage points higher than other municipal borrowers’, up from a difference of just 1.5 percentage points at the beginning of 2012, according to Municipal Market Data.

The possibility of a credit downgrade also hangs in the air, something that could lead to more selling.

“There is no specific event looming on the horizon,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia. “But it’s a problem of immense magnitude, and it’s very challenging to sit here and see how they work their way out of it.”

Puerto Rico needs to be able to issue bonds at attractive rates to cover its short-term financing needs. Perhaps more important, it has to figure out how to salvage its retirement funds. After shortchanging them for years, it now has the weakest major public pension system in America.

The main fund, which serves about 250,000 government workers, past and present, is only 6 percent funded — a small percentage of what is considered the minimum needed for a marginally healthy pension plan — and could run out of money as soon as 2014. Another fund, for about 80,000 teachers, which is 20 percent funded, will last just a few years longer if nothing is done. Police officers and teachers in Puerto Rico have opted out of Social Security and rely entirely on their pensions.

“For now, I’m not totally shaken about the possibility of the fund going broke,” said Jorge Ramón Román, a 78-year-old retired instructor for the island’s Civil Air Patrol. “But I do fear for the future, when I’ll be an even older person, more infirm and with less of a pension.”

Héctor M. Mayol Kauffman, the executive director of the pension system, said it would be impossible to cut the benefits of people who are already retired, citing court precedent.

Puerto Rican officials were racing this fall to put together a rescue plan for the pension fund. Voters, though, pushed out Gov. Luis Fortuño, who had tried austerity measures that included cutting tens of thousands of government workers along with a revamping of the fund.

They elected Alejandro García Padilla, who promised to create 50,000 new jobs in the next 18 months. But the margin was razor-thin and Mr. Fortuño has requested a recount. Mr. García Padilla’s party had dropped out of the retirement overhaul effort, but the governor-elect says he will deal with the looming pension crisis with “diligence and promptness” and has put together a task force of economists and financial advisers.

“We will not leave retired government workers stranded at a bus stop in their older years,” he said.

Since the election, yields on the island’s 30-year bonds have continued to widen.

“I don’t think that there’s a default that’s about to happen, but a default isn’t the only bad thing that can happen when you’ve got bonds,” Mr. Schankel said. Puerto Rico’s bonds are just a notch or two above junk status. If they fall to that level, at least some institutions would be forced to sell, potentially setting off a chain reaction. And individual investors could get a jolt if they saw the value of their holdings fall. Many people own Puerto Rican debt without knowing it, through their mutual funds.

“The concern is that Puerto Rico is a systemic risk to the municipal bond market because it’s so widely held,” said Robert Donahue, a managing director with Municipal Market Advisors.

Rafael Matos contributed reporting from San Juan, P.R.

Article source: http://www.nytimes.com/2012/11/27/business/puerto-rico-races-to-rescue-its-pension-fund.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Ireland Jails Sean Quinn, Once Its Richest Man

November 3, 2012 by Leave a Comment

DUBLIN (Reuters) — Ireland jailed the former billionaire Sean Quinn on Friday for failing to disclose assets he was hiding abroad, completing the fall from grace of the richest man in Ireland’s “Celtic Tiger” boom.

Mr. Quinn, whose 4 billion euro ($5.2 billion) business empire collapsed after a disastrous investment in the now failed Anglo Irish Bank, is the first major player jailed in connection with the country’s economic collapse, having come to personify its boom and bust.

He was found guilty of contempt of court in June for violating an order not to block state-owned Anglo, since renamed the Irish Bank Resolution Corporation, from seizing foreign property assets worth an estimated 500 million euros.

He was initially spared prison and ordered to disclose information regarding assets spread as far afield as Russia, Ukraine and Belize.

But Justice Elizabeth Dunne told a Dublin high court on Friday that Mr. Quinn had only himself to blame over contempt she described as “nothing short of outrageous.”

“I cannot ignore the extent and degree of contempt of court on his part; the appropriate term by reasons of noncompliance with the orders is nine weeks,” said Judge Dunne, who deemed Mr. Quinn “evasive and uncooperative” when giving evidence.

Mr. Quinn, a father of five who used to fly around Europe on his Falcon jet sealing property deals, sat in court with a tissue held to his face. His eyes bloodshot, he stared straight ahead as the sentence was handed down.

The judge said she would consider placing a stay on the jail term until a Supreme Court appeal against the contempt is heard, but Mr. Quinn opted to start his term immediately, meaning he will spend Christmas behind bars.

He had tears in his eyes as he said goodbye to supporters and family members before being led out of the court by police. He told reporters he had made mistakes but that the “whole thing is a charade.”

Mr. Quinn’s son Sean and nephew Peter, who were also found guilty of contempt, were handed three-month jail terms in July. Peter Quinn fled the jurisdiction to Northern Ireland while his cousin served a full sentence.

Ireland’s costly banking rescue helped push the country into seeking an international bailout two years ago this month. It is the subject of intense negotiations in Europe to ease the burden as Dublin tries to exit its program next year. In the country’s boom years, Mr. Quinn turned a rural quarrying operation on his family farm into a global business empire spanning wind farms, cement plants and hotels, but he became the subject of the largest Irish bankruptcy order ever just four years after becoming its richest man.

He is still regarded by some as a hero thanks to his role as a big employer in his home county of Cavan. Thousands of locals, including sports figures and politicians, have held two rallies since August to support him in the court proceedings.

Mr. Quinn’s use of loans to make the ill-fated investments in the former Anglo resulted in the failed lender pursuing him for debts of almost 3 billion euros in a global treasure hunt from courtrooms in Dublin to the British Virgin Islands.

Article source: http://www.nytimes.com/2012/11/03/business/global/ireland-jails-sean-quinn-once-its-richest-man.html?partner=rss&emc=rss

Filed Under: Business News Tagged With: , ,

Europe Stands Firm on Airline Emissions, Raising Fears of a Trade Conflict

January 6, 2012 by Leave a Comment

BRUSSELS — The European Commission said on Thursday that airlines that did not follow a new European law requiring them to account for their emissions of greenhouse gases could face being banned from European airports.

The warning was the latest stage in an escalating war of words between the European Union and countries like China, which have expressed fierce opposition to a law that represents the European Union’s boldest move to date to protect the climate.

The initiative went into effect at the start of the year and involves folding aviation into the European Union’s six-year-old Emissions Trading System, in which polluters can buy and sell a limited quantity of permits, each representing a ton of carbon dioxide.

A European ban on noncompliant airlines would be a measure of “very last resort” applicable only in cases of “continued noncompliance,” Isaac Valero-Ladron, the commission’s spokesman for climate action, said on Thursday at a news conference in Brussels.

Mr. Valero-Ladron said airlines would initially face fines by national authorities of 100 euros ($130) for each ton of carbon dioxide that they failed to account for under the permit system.

“We’re confident the companies will comply,” Mr. Valero-Ladron said. “The penalties for noncompliance are much higher than compliance.”

Even so, the Europeans and opponents of the system, including airlines and the authorities in China and the United States, will probably have to compromise at some stage to avoid the dispute turning into a disruptive trade war.

In the United States, the House of Representatives has already approved a bill that would bar American air carriers from participating in the system. A similar bill has been introduced in the Senate.

Airbus, the European aircraft maker, and the Association of European Airlines, an industry group, have raised concerns that a trade conflict with the United States and China could affect their businesses.

Earlier Thursday, a Chinese foreign ministry official reiterated a call for Europe to seek an international agreement on how to regulate emissions from the aviation sector before imposing “unilateral legislation,” The Associated Press reported from Beijing.

Chinese airlines have not yet decided whether to add a ticket surcharge to help offset the costs of the system or to refuse to pay the fines entirely. “It has not come to that stage yet,” said Chai Haibo, the deputy secretary-general of the China Air Transport Association, according to The Associated Press.

Chinese carriers have also threatened to bring a lawsuit, possibly in Germany, where the authorities will oversee the application of the system to several Chinese airlines.

But airlines do not need to hand over permits accounting for their emissions until April 30, 2013, and that could leave room for a compromise to be found over the next year.

Last month, the European Union’s highest tribunal, the European Court of Justice, rejected a complaint by a group of American airlines that had argued that requiring them to participate in the emissions-trading system infringed on national sovereignty and conflicted with existing international aviation treaties.

Article source: http://www.nytimes.com/2012/01/06/business/global/eu-toughens-stance-in-airline-carbon-dispute.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,