Wednesday, July 15, 2015

Deal...or No Deal?

I do miss the Howie Mandel gameshow (old episodes may be found on the GameShow channel), with the low-ball bids from the invisible Banker, the 30 gorgeous models with briefcases, the contestants buffeted by family, the crowd, the odds.  There is a show on the Italian TV network called "Affari Tuoi" (I'd translate it as "It's Your Affair", in the sense of "your business") which utilizes many of the same features, but with hand-picked folks from the various regions of the country (a sprinkling of the local beauties, but some quite the opposite) with lockboxes in place of the models with briefcases. 

This is the moment of the Big Deals, of reckoning with three cases of serious moral hazard.  Later will be the time when those deals fall apart.

First, the Iran nuclear weapons deal.  It seems that most of the red lines were overcome--I did not hear how the controversy on arms trading on conventional arms with Iran came out (one of the principal parties to the negotiation--Russia--was against continuing the ban); one way or the other, I figure it will happen, and it is probably exponentially harder to monitor successfully than nuclear arms development.

I see lots of reasons to support the agreement, and not many to oppose it.  For me, it is a starting point for encouraging Iran to be a positive contributor to the world community, and this is even more important than whether or not they want to complete a nuclear device.  We already have the worst state in the world--North Korea--as one of the nuclear club, and one in Iran's neighborhood--Israel--is an unacknowledged member. (Which makes Israel's hardline opposition somewhat hypocritical;  yes, they can argue that they should be the only country in the region to have nuclear weapons, that they are the most reliable--except when it comes to admitting their nuclear weapons program--that they are our allies, etc.  Doesn't mean the rest of the world has to agree with that argument.)

President Obama has said he will veto any attempt to block the deal, and that means something important, that Congress (or even the Senate) does not have to pass anything in a positive sense to approve the deal.  I wouldn't count on its occurring.   We can expect Iran to do everything in its power to work around the limits of the deal's reach, so the extra time setting up obstacles to that happening were well worth the time spent.  I would not expect Iran to renege on the deal, at least until Khamenei and the current President, Rouhani, are out of the picture.

Second, the Greece/Eurozone deal.  The 'no' on the the Greek referendum obviously didn't count for much with Greece's counterparties, who extracted a deal worse for the Greeks than the one the plebiscite rejected.  It is such a bad deal that Greek Prime Minister Tsipras has already disavowed the reforms which he is asking his Parliament to approve.  This is a deal that is doomed to fail; everyone tacitly sees that.  The Germans seem to have extracted some promises so that it will cost the Greeks when they fail; their policy has been a brutal, vindictive one that bodes ill for the Eurozone, and everyone else will notice that.  So, the discussion will probably move from the fate of Greece in the Euro to a restructuring of the deal to provide more sovereignty--probably in the form of some safety valves--for the rest of the members, who can see that what happened to Greece will eventually happen to them.

My short-term prediction:  Greece's Parliament does not have the votes to approve the package by the due date of midnight tonight (Europe time).  Tsipras will wait for a vote until he can count a sufficient number of 'yes' votes (many of which will have to come from outside his government coalition).  Then the Europeans will be in the position Greece was in--take it or leave it.  My guess is they will not take it, with the behavioral evidence being releasing funds to reopen the banks, and the discussion will resume again next week.  The shock to the markets (outside Greece) progressively becomes less, so the focus may turn back to what is best for Greece, which was certainly not the case in the marathon negotiations over the weekend.

Third deal--yet to be consummated--concerns Puerto Rico and a number of its state functions for which it can not pay the bills.  P.R. would like to declare Chapter 9 bankruptcy to reorganize its debts, but that action was specifically prohibited by the latest U.S. Bankruptcy Act a few years ago. The US government has stated firmly that there will be no "bailout", meaning appropriation of funds to cover the losses of the boricuan creditors.  The creditors refuse the idea of any new legislation to allow PR to declare bankruptcy--the applicability of which to debts created without that recourse would certainly be challenged in the courts.  They have a point; the pricing of the loans to Puerto Rico would have considered the fact that the territory could not resort to bankruptcy to discharge the debts, but there has always been the risk of default, and that has increased, to the creditors' detriment. The resolution I foresee would be a refinancing of the territory's debts, with higher interest rates, and some sort of guarantee on (at least some of) the new debts from the US government.

The one positive that seems to be emerging from this problem is that it will focus the US Congress on the economic issues of the territory and on consideration of its future.  I visited Puerto Rico frequently for business some 25 years ago, and it looks like very little has changed--except that there continues to be a talent drain of the best puertorriquenos to the US, one that is totally legal migration: it's not even immigration, and Donald Trump can do nothing about it (although I am sure he employs many of them in his enterprises).

I find it most interesting that Jeb Bush has come out  during his campaign in support of relief for Puerto Rico, up to and including statehood for the territory.   He alone of the Republican Presidential candidates (including nominal Hispanics Marco Rubio and Ted Cruz) has a strategy to try to gain Hispanic political support.  I  reviewed the somewhat paradoxical politics of the question of Puerto Rico statehood long ago:  the local party affiliated with the national Republican party is pro-statehood, while the one associated with the Democrats is in favor of continuing the status quo (indefinitely?) as a "commonwealth" territory, which is viewed by a plurality of Puerto Ricans as the best of both worlds, with regard to the US;  it gets tax benefits and investment money with less obligations.  This may be changing, though, as the current deal seems to be souring there.

The national Republicans might also reconsider their position if a vote on statehood actually approached, as it would seem unlikely that the state would go red in national elections just because of their support for statehood:  I would suspect the Puerto Rican statehood party would also suspect a trick.  One certain result if Puerto Rico became a state; Mississippi would be promoted out of  last place in most state tables of quality of life.  So that might be one state's delegation that could support the proposal.

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