World View: Countries Line up for and Against Saudi Intervention in Yemen

This morning’s key headlines from GenerationalDynamics.com

• Puerto Rico bankruptcy may be imminent, potentially a ‘seminal event’
• Israel releases tax revenue collections to Palestinian Authority
• Mideast nations line up for and against Saudi airstrikes in Yemen
• Mideast countries opposed to Saudi intervention in Yemen

Puerto Rico bankruptcy may be imminent, potentially a ‘seminal event’

Puerto Rico landscape

Marilyn Cohen, the CEO of Envision Capital Management, appeared on Bloomberg TV on Friday to analyze the debt situation in Puerto Rico. According to Cohen, a $70 billion bankruptcy in Puerto Rico is a virtual certainty, as early as July.

Many people have invested in Puerto Rican bonds because they pay 10% interest (yields) and because under federal law they are “triple-tax free,” meaning that you can earn 10% interest every year and not have to pay federal, state or municipal tax on the interest you collect. It is a sweet deal provided that Puerto Rico does not go bankrupt, because if it does, then you lose most or all of your initial investment.

According to Cohen, the unemployment rate is 13.7%. Only 700,000 of the 3.5 million people, or 20%, work in the private sector. The other 80% either are on welfare, or they receive unemployment or other aid, or they work for the government. Year after year, Puerto Rico sells more and more bonds, and investors eat them up because of the high tax-free yields. But now their string has run out.

According to Cohen, the bankruptcy will hurt a lot of people. She compares it to the Detroit bankruptcy, which did not really hurt too many people — the bankrupt debt was $18 billion, but few ordinary people owned Detroit bonds, as most investors were institutions that hedged their purchases with credit default swaps.

But Puerto Rico’s debt totals $70 billion, and she says that huge numbers of ordinary investors are going to be hurt. Even if they may not individually own PR bonds, they own them through their 401k’s or other investment funds, which have been boosting returns by purchasing the PR bonds. These funds will all lose significant principal in a PR bankruptcy. According to Cohen, this bankruptcy will be a “seminal event.”

After Detroit and Puerto Rico, Cohen says that the most likely next municipal bankruptcy will be Chicago, whose finances are “a mess.”

By the way, if you’d like to ignore these warnings about Puerto Rico and move there, there are numerous tax incentives available to individuals there not available anywhere else:

• 100% tax exemption on interest and dividend income earned after the nonresident individual becomes a resident of Puerto Rico; also applies with respect to alternative minimum tax (AMT) up to tax year 2036
• 100% tax exemption on interest, financial charges, dividends or distributive share on partnership income from international banking entities in Puerto Rico including AMT
• 100% tax exemption on long-term capital gains realized and recognized after becoming a resident of Puerto Rico but before January 1, 2036
• If not realized and recognized within the incentive timeframe, regular individual long-term capital gain applies (currently at 10%)
• Applies to appreciation of property after becoming a resident of Puerto Rico
• 5% tax on long-term capital gains realized before becoming a resident of Puerto Rico, but recognized after 10 years of becoming a resident of Puerto Rico, as long as recognized before January 1, 2036
• This 5% long-term capital gain tax only applies to the portion of gain that relates to the appreciation of the property while the individual lived outside Puerto Rico
• If the long-term capital gain is not recognized within these time periods, applicable individual long-term capital gain rate would apply on any Puerto Rico-source long-term capital gain

So enjoy the free ride while you can. Bloomberg TV and Bloomberg (16-March) and Premier Offshore Investor

Israel releases tax revenue collections to Palestinian Authority

After Palestinian Authority (PA) president Mahmoud Abbas applied in January on behalf of the State of Palestine to join the International Criminal Court (ICC), Israel retaliated by withholding $130 million per month in tax collections from the PA. This is money that Israel collects administratively on behalf of the PA in taxes and fees.

Although there were the usual expressions of international outrage directed at Israel, everyone mostly assumed that Prime Minister Benjamin Netanyahu made this decision to please his supporters during an election campaign, and that the funds would be released at some time in the future, after the election.

Well, the election is over, and “some time in the future” is now. Israel announced on Friday in a press release that it will release the money to the PA government in Ramallah.

In December 2012, Israel withheld $100 million in tax revenues from the PA in retaliation when Mahmoud Abbas applied to the United Nations General Assembly to create a state of Palestine with non-member observer status. However, the tax payments were reinstated shortly afterwards. Jerusalem Post and AP

Mideast nations line up for and against Saudi airstrikes in Yemen

Two days after an 8-nation US-backed coalition, led by Saudi Arabia, declared war on the Houthi insurgency in Yemen and began airstrikes at Houthi targets in Yemen, the countries of the Arab League are meeting in Sharm El-Sheikh, Egypt, to decide what to do next.

The United Arab Emirates (UAE) and Kuwait are particularly disturbed by the growing Iranian/Shia hegemony growing stronger in the region, and so are supporting the Saudis. Morocco, Jordan, and Egypt are traditional Saudi allies and are participating. So is the Palestinian Authority of Mahmoud Abbas.

For some countries, participation is a surprise, or at least mildly unexpected. In Bahrain, Sunnis are in a minority, but they still rule over the majority Shias. Qatar is considered the Persian Gulf’s “problem child.” It has many disagreements with Saudi Arabia, and has relatively strong channels of communication with Iran.

Sudan is the most intriguing Saudi supported. Sudan has had close relations with Iran, and Iran has used Sudan as a waypoint in the transfer of heavy weapons into the Gaza strip. Sudan has recently accused Iran of “spreading Shia ideology,” and its siding with the Saudis against Iran is a dramatic statement of intent.

Pakistan is also supporting the Saudis, though less actively. The Saudis have long had an agreement that Pakistan will supply Saudi Arabia with nuclear weapons technology if Iran gets a nuclear weapon.

Turkey’s president Recep Tayyip Erdogan has long had, or tried to have, good relations with Iran, but on Thursday said it supported the Saudi-led operation. According to Erdogan,

Iran is trying to dominate the region. Could this be allowed? This has begun annoying us, Saudi Arabia and the Gulf countries. This is really not tolerable and Iran has to see this. […]

Iran has to change its view. It has to withdraw any forces, whatever it has in Yemen, as well as Syria and Iraq and respect their territorial integrity.

However, Iran’s foreign minister Mohammad Javad Zarif denounced Erdogan’s statement of support for the military strikes in Yemen and for suggesting that Iran is seeking to control the region. Zarif blamed Erdogan for fomenting regional insecurity and stated: “It would be better if those who have created irreparable damages with their strategic blunders [referring to Turkey’s role in the ongoing Syrian crisis] … would adopt responsible policies.” Zarif reiterated Tehran’s support for a political resolution in Yemen. YNet (Israel) and Arab News and AEI Iran Tracker

Mideast countries opposed to Saudi intervention in Yemen

There are several countries that are opposed to the Saudi-led intervention.

Iran, of course, is the leading opponent, and is suspected of supplying weapons and support to the Houthis in Yemen. Iraq, whose government is a close ally of Iran, is strongly opposing the Saudi military intervention.

Lebanon’s support is split, just as Lebanon itself is split between Shia and Sunni factions. Sayyed Hassan Nasrallah, leader of Iran back Shia faction Hezbollah, was particularly vitriolic on Friday. In some of his harshest comments to date, Nasrallah accused Saudi Arabia of sending suicide attackers to Iraq and of creating the Islamic State (IS or ISIS or ISIL or Daesh). Addressing Saudi Arabia, he said Iran had expanded its influence in the region because “you are lazy, losers, and you don’t take responsibility.”

Algeria is usually disinclined to get involved in regional crises, and opposes the military intervention. Oman stayed out of the alliance in the hope of acting as a mediator. Lately, Oman has played a significant role in the US-Iranian thaw that allowed nuclear talks to advance.

As Generational Dynamics has been predicting for years, the Mideast is headed for a major war between Jews and Arabs, between Sunnis and Shias, and between various ethnic groups, and this war is coming with 100% certainty as the survivors die off from the genocidal 1948 Mideast war that followed the partitioning of Palestine and the creation of the state of Israel. Think back to how relatively peaceful the Mideast was just five or six years ago, and you’ll realize how quickly the Mideast is now descending into chaos, as more and more of those survivors die off. These trends have been accelerating even in the last few weeks, and it is hard to escape the feeling that all-out war cannot be very far off. YNet (Israel) and AP

KEYS: Generational Dynamics, Puerto Rico, Marilyn Cohen, Detroit, Chicago, Israel, Palestinian Authority, Mahmoud Abbas, Benjamin Netanyahu, International Criminal Court, ICC, Iran, Yemen, Houthis, Saudi Arabia, United Arab Emirates, UAE, Morocco, Jordan, Egypt, Sharm El-Sheikh, Arab League, Bahrain, Qatar, Sudan, Gaza Strip, Pakistan, Turkey, Recep Tayyip Erdogan, Javad Zarif, Syria, Islamic State / of Iraq and Syria/Sham/the Levant, IS, ISIS, ISIL, Daesh, Lebanon, Sayyed Hassan Nasrallah, Hezbollah, Algeria, Oman
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