low levels for many years and even after -- cofina -- after the first appearance pc. the reason for that was that the cofina and that was always seen as being able speed is about the green line? is about the yield statement is the green line right. the green line. you can see that timelines on it as you go into january of last year, it jumped and, of course this may and june it is jumped. if this were updated you would see it even higher up in the 14% level. that there is come is that, and we think this if i could happen is that puerto rico is going to try to essentially grab a sales tax revenue and claw it back to the commonwealth. whereas bondholders have always expected that they get first claim on the sales tax. we will see whether this happens

but there's so that the fear factor now that protection you have the bond holder with elaine on the sales tax is going to be a tax. here's the geode debt. it's important to look at the comparison. in our view where we have exposure to puerto rico is only in insured order we could get. that is by two of the insurers sure to guarantee and in the nia. that's all we are. we on a specifically their and started doing it for some selected clients in march of 2014. so this was after yields had risen to the interesting part is that as the news got worse in puerto rico through the fall you can see that all three, both in church as well as the uninsured debt rose.

so one is the actual line for aaa securities. that's the great line. the blue line is the injured puerto rico bond and the green line is the uninsured. so for the first four months everything goes up in a vacuum. and then you see the market start to discern the difference between an insured bond and an uninsured bond. that they diverge. c. can see the injured yields which we started getting involved in that 6.5-7% level have worked their way all the way down to about five. at the jumped a little bit yesterday the way you saw a few pieces yield around six but there were not enough trades to really hang your hat on. it's interesting of the market start to dissect things. by the way not that it is ending to do with today's discussion, if you look at it out of chicago's g.o. debt insured versus by same pattern you see in

the middle of this graph and all going up upward yield draft right now and we fully expect that to be sorted out. one of the things that we look at with the insurers and the reason we are involved is that we believe the insurance have plenty of capacity to pay any puerto rico claims. and remember the bond insurers obligation is to pay principal and interest when do. so the fact is you have a bond due in 2035 where there is possibly a default over nonpayment. the president -- president of that is much lower. as we saw in detroit, the bond insurers originally were being offered 15 or 20 cents on the dollar. it ended up settling for 80 cents on the dollar. they have lots of clout in terms of trying to get restructurings a done and we believe this is going to be ongoing in puerto rico also.

the sales tax this is just too sure your senior versus subordinate. the subordinate debt when they got clobbered yesterday because if they think there would be clawbacks that would be the first to get hurt. the electric authority dave mentioned possibilities of instruction. again, insured versus uninsured that gap is usually why do. we fully expect to see some restructurings in the electric authority, and the highway authority. the markets estimation is that 70 cents on the dollar will be the new power. that hasn't started yet -- park. the july 1 payments are in the bank and can be made so that more everybody should be getting paid. the governor goes on tv and says we cannot pay our debts. there's a big difference between

saying we cannot pay our debts or we don't want to pay our debts. one of the real issues, this would be the crux of not only the insurers but also some hedge funds that got involved. you saw hedge fund involvement round last spring. most of the hedge funds have signed a nondisclosure agreement with the puerto rico so that they can get access the data and basically a bargaining chip in return for low-income or money. that nondisclosure agreement means that they more or less have information that we don't have enemies they cannot trade with anybody else other than themselves. i'm not sure that's hoping right now. they wanted to go to puerto rico and say we pull into more money. if you do abmc. puerto rico wants none of that and that includes reducing payroll, cutting benefits et cetera. and they don't want to do that every member puerto rico doesn't have access to chapter nine bankruptcy. they would like to fast-track this in congress to allow the.

data directly granted access to chapter nine or fast-track interstate it and then they would be eligible in chapter nine and that's not happening. but the interesting part of it is that even if they had chapter nine they would be required to show that they have taken steps and all the steps necessary to try to pay their debt. they wouldn't even be close to the still has a long way to play out. a little bit on the crisis, government debt equals more than 93% of gross profit. week and to liquidate shrinking manufacturing, if a touch of these. large unfunded pension liabilities, so the story is not good. here is the reason why we like the puerto rico insured that. and what we do here is we compared long waits has a higher underlying rating and puerto rico but not much. it's still a u.s. territory.

we have puerto rico insured and they are trading on this graph 200 basis points apart. to be probably if you saw some insured trades, probably closer to 250 today after yesterday. when you look at the insurance agreement and both bonds it reads exactly the same. so what is one trading 2% cheaper than the other? and the answer is simple. its headline risk. the market discounts headline risks i get a new higher yields. this isn't true in this case and what we think is that eventually things most of this is because you don't have the retail participation. right now you would to any of the major brokerage firms investors could come in and buy guam insured paper. as soon as everything hit after the parent article not too many more months, of the major

brokers firms suddenly been through down the barn door and said we are not going to let our clients by any mark puerto rico paper. this is after yields have already risen 200 300, 400 basis points more. so after the horse left the barn and they said you can't buy anymore. we actually think that puerto rico is very close to getting this petroleum tax deal done, and it had gotten that done you would've seen the insurers we take a piece of that because of the way the tax would be dedicated. if the brokerage firms like they morgan stanley's and the merrill lynch of the world have extra got involved in that it will be very hard to tell the clients they can't buy the insured puerto rico deal when they are underwriting. the ipod is when retail is allowed to buy the injured puerto rico, these yields will decline. right here kind of gives you an idea, puerto rico and g.o. debt versus its population. you could look at this and put

detroit up the last you and would've been a very similar looking graph. clearly one of the things they need to do is have cut back on the budget level. we haven't seen that yet. this is the puerto rico bellwether bond him and issued these last, year ago march. they came at a discount at 93 cents on the dollar to yield a .75. you could see the price of the bond has declined in potentially decline in the last few days and whereas it had been trading at 76 cents on the dollar as of a week ago it is now down to about 64 cents on the dollar, 65 cents on the. and it is yielding well over 12%. the real question is we know the electric and i with sword will most likely have to restructure. the question is is the

commonwealth going to have to restructure? want the keys when they brought this deal together $3.5 billion in march 2014, all you heard from the government was the g.o. pledge of puerto rico is sacrosanct and we'll continue to make good on payments and we will keep you updated on progress, on reforms. you haven't seen any of that. and the problem with that, of course, a lack of communications is reflected in the dollar price of this bond. personally and i am not speaking for the firm, i find it hard to imagine a united states leading a u.s. territory but wonder. when you think about it, it's not like detroit where it reports to the state of michigan. here you have puerto rico reporting into the united states. if i'm a holder of u.s. debt china, and i own billions of dollars of treasuries, federal mortgages, i want to wonder if

you are leading a u.s. territory giunta, what's next? is it fannie or freddie mac? is it better farm credit bureau sallie mae? i think the united states needs to get involved a little more. quickly went through this. so many of the yields on debt. you can see it has skyrocketed. this will sort itself out over the next few days but it is clearly not in a very wide. credit ratings, thanks. credit ratings, dave touched on this, have been clobbered. with because yesterday the next up will be a default. i just thought i would bring this up since were talking about greece as well. you can see this as now greece and puerto rico are basically trading at multi-digit yields. the interesting part of the

yield curve themselves. here you have a very flat yield curve but it's actually negative which tells you in the beginning years people are accepting, or wanting bigger yields than they want out in the four years which tells you that the market, even though it's a huge discount are expecting a solution to this down the road as opposed to a default which never stops. when you restructure eventually you start paying your loans again. this is puerto rico spring of lester versus now. you can see the huge uptick in yields. greece now versus fall of 14. again just a few months ago greek paper was trading at 6% and any heartbeat it was back at 11. markets adjust quickly both up and down. >> thank you, john. desmond.

>> thank you very much, alex for arranging this. what i wanted it is i want to talk a little bit about the similarities and differences between the greek and the portuguese -- the puerto rican situation. and i thought that i might start just with approach from the great russian economist leo tolstoy who said, all happy families are alike but each unhappy family is unhappy in its own way. andi think here's what we've got is we've got to unhappy dysfunctional economies that are unhappy in their own way. so to sum up the similarities, i think if you look at the debt numbers and a gdp outlooks

you've got to come to the conclusion that both of unsustainable debt levels but come at ago in a currency union, but they might have got there in a different way. and to get into that in a moment. both are in economic down spirals, but there's a difference between the greek and the puerto rican down spiral. the puerto rican down spiral looks more like a secular problem with structural issues really driving it down to higher labor costs are too high electricity prices or not really compared markets were as the greek case was a situation of a cyclical mood because they tried to do too much budget adjustment within a fixed exchange rate system if they learn that if you do that what tends to happen is the economy collapses. of course, neither of the two economies, greek or puerto rico

have bankruptcy provisions. i think that is going to be a lot more serious a case of puerto rico considering the difference in the structural of the debt that i want will get to in a moment. and then of course, there's the question of the systemic fallout. in the case of greece the systemic fallout could be a lot more serious because what the greek defense could do in time to it could spread contagion to other troubled countries in the european periphery, like ireland, portugal, spain italy most notably italy and then we could have a systemic problem. i don't think that that's the case in puerto rico that if you get a problem in puerto rico it's going to be upsetting for the municipal bond markets but i don't think it goes much beyond that. of course, the trouble is, that looks like where we are headed come if we would get a greek event and a puerto rican bench

in close proximity. so it might not be easy to sort the two out. let me talk now about to prevent the unsustainable debt position that if we just look at the numbers, greece, it's quite on the greece to the duration is gone from around the 100% to 180. i might just remind people that that is after a massive right out and the privately owned debt that there was a 75% net present value right down from about 150 $200 billion of greek debt in 2012. so it is quite an achievement to get it debt to gdp level that i. puerto rico's debt to gdp which is a better metric for that come as mentioned before, is gone up

close to 100%. what really strikes me is how this progressively goes up at this issue is suggestive of something that is not sustainable. it can't keep rising like that. it's going to mean you've got the deficits in the government deficits incorporations coupled with very low growth keep pushing the debt ratio of and that is a party that really has to come to an end. now, there are similar underlying causes to the two problems then, of course, the differences, greece was case of prophecy that was made possible by very low interest rates when they joined the euro. interest rates converge to european levels the german and french banks fell over themselves to lend to the greeks. while there was no budget discipline greece manages to run

about budget deficits around about 50% of gdp by 2010, and that comes to a crashing end. puerto rico, the situation is a little different. i think what has facilitated this has been de facto tax-free status on the bond. that makes it really very attractive and the markets in the wisdom cofinancing in unsustainable position and deal events. what is already impacting both the debt levels is the fact that the economies are already decline in the big time way. the pace of greece is really impressive. just take a look at this chart. what is targeting is it's comparing the trajectory of greece's gdp since the crisis began, they ran about 2009 to what happened in the united states during the great depression.

you can see by this time in the great depression in the united states we were already in upturn significant upturn. greece was down to her and the low point in the great depression and given the events that are going on increase right now, i don't think you've got to be a ph.d economist to know that the economy is taking another body blow and really that decline is going to continue going forward and, obviously, that makes it difficult in terms of getting to the debt dynamics stable. if we look now which i think that this chart is rather enlightening this this compares puerto rico to greece and we are looking at it from roundabout 2005. that's where they start. greece is the blue line. puerto rico doesn't look too good here. puerto rico is a down over a

ten-year period. we are talking about something like a 15% contraction in gdp. that doesn't make good for the what and which you've got to be able to repay your debt. obviously, they've got to put their gdp on quite a different trajectory. what is occurring in puerto rico which really has to be disconcerting in terms of whether or not puerto rico is going to turn around the web you can revise it. weak economy, if they get out of the euro a more flexible and policies that can pump the economy of to some degree. order rig was having a problem come everybody is leaving puerto rico, understand that right now they are more puerto ricans in mainland, united states and on the island. and they keep leaving after a something like 48,000 a year and who is living off a 25-44

year olds are and who is staying company elderly people not to do anything against old people -- [laughter] -- of young people need to support the old people. so from a demographic point of view looks somewhat of a disaster that's my real concern to the united states. let me talk about the challenges to both economies because i think that is really very open with the lessons are delivered from the greek crisis. the truth of the matter is as i said before both of them are stuck in a currency unit. what this means is as we learned in greece come if you tried to do a lot of budget adjustment, a lot of belt tightening, whichever way you do it but that tends to get is that reduces aggregate demand and you can't offset it with a cheaper crunch or with you on monetary policy.

so greece tried to give nasa budget adjustment saw its economy collapsing to the reason i'm not too optimistic on puerto rico and the reason why i would share that view that discussion is a real debt to sustain only problem is that if they try to raise taxes and cut spending to quickly and raise electricity prices and do all the rest, but they will do think the economy even further, the people to immigrant to mainland and that is not just a viable proposition to have that debt repaid. if i could just talk briefly on that structure because israel has relevance in terms of how this is all going to get resolved. if you look at the greek debt structure, some 315 billion euros, one euro equals a dollar but that may be going forward,

you've got a huge amount of debt that is basically all officially owned. so a lot of it is to the europeans, big chunk to the ecb, chunks to the imf. so the debt restructure really depends on what the official creditors are going to do. the official craters what they're doing is pushing out the maturities, reducing the interest rates alone to write it off but you can't bring down the effects of debt-to-gdp ratio that way because if you push out 50 years the the maturities and you charged the no interest that's the equivalent to writing the debt off and that's the way it will go. puerto rico is a different kettle of fish it out of this chart current issue a notion rutherford many different pieces and that there is revenues pledged here and different claims they're into a lot of different interest.

i wish i got a lot of good luck in trying to restructure the debt. question of course is if you don't have the bankruptcy court so that makes it very difficult my take on it would be that why you can't look at these as individual pieces because if you do something on the electricity prices, that might have an impact on the other bondholders might make the holders of electricity bonds happy but it will be disadvantaging other bondholders because what you would do is impact the way in which the economy works. last point is just what i've mentioned before is that the fallout from the debt default the greek case i think that you could have very serious effects

long-term. i'm relatively optimistic. short-term end at this time around as opposed to 2012 europe is in a very much better position to win this race is worthy of the couch in the periphery, mechanism that a $500 billion more important he got european central bank has got a printing press at the now seems to be happy. using a printing press is buying 60 billion euros of bonds. i would expect that if there is contagion of any serious means mr. drive he will come up with another whatever it takes statement and people back it up with action that will stabilize it. long-term different story because long-term if greece leads the euro we really change the picture the way in which europe works is that the belief that euro membership was irrevocable is no longer in

play. so when italy comes under attack it's got a debt to gdp of 135%, it doesn't it's got no growth to speak of his political problems to italy in time will come under attack. that's going to be a lot more difficult but that is down the road as i said, just to conclude puerto rico i don't want to minimize the fact that it's got $73 billion in debt. if you just put that into perspective, i understand the detroit bankruptcy was only something like 7 billion. you're talking about 10 times the size. so this might be a wakeup to bondholders in high-yield markets. the armistice as there are risks and when the fed starts raising interest rates things might not look so pretty. thank you. >> thanks very much, desmond.

>> alex, thank you very much and am very glad to be here with you today to discuss a very troubling situation. let me see. big question is is puerto rico america's greece? to this i would say both yes and no, i don't talk about that more as i proceed. first of all i think it's important to begin as others have talked about to differentiate what their political status is the greece of course is an independent nation state, but still highly dependent financially on the eu. and also i think it's important to also keep in mind there's also the possibility greece could exit the european union. this i think increases would you like a dilapidated abandon the euro. there's a real close eye they are between greece's continued use of the euro as its currency and discontinuation in the eu.

so looking at puerto rico, we have a very kind of limbo like situation here where puerto rico has some broad and hard to break ties with the u.s. first of all puerto rico residents are u.s. citizens. puerto rico as the dollar. and, of course, enjoys substantial subsidy. now, in terms of cash flow to and from puerto rico from the federal government but also the tax exemptions on the debt issues that's been been talked about but, of course, puerto rican citizens don't pay generally speaking u.s. personal income tax. the options are statehood, full independence or maintenance of the status quo. over the years there's been a lot of debate and puerto rico about what their long-term status should be but all of that, of course, is unresolved at this time. but i think again coming back to point that's been made earlier,

the situations are different because of their current political status. i didn't puerto rico it's difficult is are a problem the way greece's problems are not an eu problem. greece could leave the eu. puerto rico it's hard to imagine if beating the united states. it's kind of with us. whether we like it or not. now, in terms of the similarities and differences first of all neither one has a really competitive economy in a global sense. and in both cases because they they're having to operate with an oversized economy. sluggish economies, high unemployment and burdensome regulations. puerto rico of course has been losing population, i think i don't know what the population situation is increased but it's hard to imagine that it's attracting many folks these days, given its problems. and, of course those are heavily subsidized in different ways by what i will call their

parents, the u.s. and eu. and then you can finally very high debt to gdp levels. and hero of course we see a chart as to how the greek government debt to gdp has risen up to now close to 180%. ..

we have to attribute this to the "financial times" published about a month ago and it doesn't show while the interconnections that one of the things that's interesting about puerto rico for a relatively small economy it has an incredibly complicated, convoluted data structure which greatly magnifies this problem. in terms of differences greece is receiving lots of subsidies. a lot of it is an ad hoc nature and a little bit contemptuous. in puerto rico the subsidies are hardwired through statute and as i think someone said earlier there doesn't seem to be much controversy about that that are enjoyed. arguably the tax break for puerto rico gets in terms of buying federal statue as part of

the recipients of interest on puerto rico debt from federal, state and local income taxes across the country, and this is seen as a benefit for puerto rico and arguably it is working against puerto rico because it made it so cheap to finance relatively speaking that incentivize puerto rico to take on even more debt and is now a burden for it. alaska to talk a little bit about banking systems. what is important to keep in mind in this day and age and what kind of shape the banks are in do reflect what is going on in the economies they are operating. the greek bangs and will have a list of those in a minute, they kept the flow and recent runs by the e.u. known as the emergency

liquidity authority, which has basically not a lot of funding to the greek banks that have been occurring. but the deposit outflows i would argue are having longer-term negative effects on the greek things and therefore on the greek economy as it tries to recover. here's some numbers on the banks headquartered in greece. desire for the banking group which includes their external operations as essentially deposits. one of the things i could point out, we see the bottom of 207 million euros as at the end of last year the funds supplied under the emergency liquidity's authority by my calculation have essentially funded an outflow of

45%. to 50% of those deposits. 93 billion euros have been advanced and this gives you an idea of the magnitude of the confidence in greece and the greek bangs has been. i didn't put a network number. they report a positive capital at the end of 2014. at the present under the denser solvent and i will be a longer-term challenge going forward is having a bustling banking system. was interesting about puerto rico banks if they are part of the fdic. they are insured by the fdic in the same way mainland empire. the fdic is funded by deposit insurance premiums. we look here at the banking system in puerto rico.

you have four banks listed here that were puerto rican headquartered and we have numbers on banks operating there was citibank of course been a major participant in scotia bank which is a canadian parent. you'll notice number one geezer numbers as at the end of june 30 last year. durell banks failed this year. here's four of them over the last four years. the number the lower right-hand corner comes $6 billion is the amount of estimated lost the fdic has taken in those failures. this is a subsidy from u.s. bank a deposit insurance premiums to protect depositors in these

bangs, not an insignificant amount of money. in terms looking at the puerto rican banks in addition to having the insurance protection which meant no on the banks can also borrow thingy too from the homeland bank of new york. consequently the puerto rican economy is not held back by weak banking system as is the case in greece that likely will continue. pardon my voice. in my opinion muddling through is not an option. that's the approach taken up to this time because the debt burdens have become intolerable and they are getting worse and then something has to happen. consequently creditors will take care coders. one can how much of the mechanism for that and taxpayers will bear some losses, too.

what are graces realistic options? one is to abandon the euro and that might lead to the e.u. but if it keeps the euro it has to dramatically reform its economy. this just no option other than doing now. who wins and who loses. first of all there would be huge balance sheets gains or losses and businesses depending within that your position is. anybody in greece who hasn't been out every euro they could put it in the mattress or bank account in another country was foolish economically. if greece goes off the air out those folks in great purchasing power will enjoy again. now it's too late for that option and that is why greek would gain if and when greece

abandons the hero. greek debtors who again that are low to the gold standard in 1933 and we might learn some lessons from now. the big question is which euro denominated debts with the greek courts enforce or not enforce if there is regression. this is an issue i have not heard any discussion about but it will become very controversial if greece in fact does drop the euro and go back to the chocolate. the big losers will be non-greek creditors and of course will include taxpayers.

puerto rico is a different situation. puerto rico will sever ties with the u.s. and abandon the u.s. dollar. the question of what are the options for puerto rico since the evaluation by a band named the dollar is not an option. they say it has to make it felt much more attractive economically and with her discussions about that. it has to be a substantial privatization. puerto rico is a socialist economy compared to the mainland u.s. and a key candidate for privatization is the utilities that is operated in its capital investment with the classic situation where privatization appropriate debt adjustment expense. puerto rico is stuck with the u.s. minimum wage and that is a very nature negative impact on

the competitiveness of puerto rican labor. unfortunately that is an action congress would have to take. just as a side for those of us who are not fans of minimum wage, the puerto rican situation provides an xml into illustration of why minimum wages or negative heard you and folks in the workforce. finally, puerto rican that and the question is the mechanism and whether chapter nine bankruptcy debate comes into play. puerto rico ought to go to do the same thing the u.s. municipalities can under chapter nine of the u.s. bankruptcy code. there are some unique aspects of the issue, which raised questions about whether or not puerto rico should be allowed to adjust the bad under chapter

nine. make sense is it's not going to happen. order reclassifying out other ways to go through negotiation with its creditors. think argentina. with that i thank you could look forward to her discussions. -- our discussion. >> a thank you. it is a pleasure to be here to talk about this in person. i think we have heard right now pretty well with the nature of the problem is. in each case we have a currency union without economic growth and non-competitive economy with lots of structural impediments in that economy to growth large fiscal deficits and the structural issues in the public sector finance this.

basically in a currency as i once heard george asked why might england would never join the hero by fiscal policy and monetary policy sedin frankford and is politically unacceptable. we have situations where economies confront an internal evaluation which basically means unemployment wage depression and so forth. they have to confront the situation. dimension has also been made by adjustment by immigration which seems to be happening in both cases. i think the previous speakers have talked about the dimensions of the problem so i won't really care either. that is my comparative advantage. when the debt to gdp ratios get to the size they are something

is not right. mention has been made of the composition of the dead and the composition of the dead has indicated a very key question going forward. why is this the case? we see a situation where we do not have a classic central government that in one or two publicly run agencies. we have a complicated system of theoretical seniority created by revenue strings. i think the legal question which we may end up getting an answer to is going to be the modern version of the question that was

asked of allen dulles when he testified in the house of representatives been examined by abe fortis in the 1950s about the bolivian tobacco revenue bonds issued in the teen 20s. he was asked about the enforceability of the covenant budging tobacco revenues and this is just all boilerplate. there is perhaps a potential difference and this is what we will see. in the case of the bolivian tobacco revenue bond there was no sheriff from the bondholders could call upon to collect the tax revenues and save it air out. 30 or 40 years before that it was still considered good form

to send the gunboats down and you put your men and the name in the customs duty neglected duties until the bonds are paid and they went home. after the convention of 1907 to collect debts the option disappeared. here in puerto rico within the u.s. legal system and there is a judge. there might reassure us and it will be interesting to see whether these different pledges of revenue streams would be honored for whether there's a general equitable mash in which it is all lumped together and started out that way. so that is one big distinction that i see that the greek situation. it's not at all clear what

happens with the composition of the greek debt and the largely public sector. it is no longer good for them to send the military to collect the debt. if we're talking about with ecb talking about the esf bilateral debts commit eib who really has seniority? what about the imf? there is one very interesting statement made when they started to create these mechanisms in europe. they said the imf is senior and we are next. but again who is the surest process this dollar goes first to the imf than a dollar goes to someone else.

when the private sector restructuring was done in greece there were many private.holders who ran their hands saying what was the special deal the eib got in the specialty that ecb got. for those of us who've been around debt restructuring dallas and the thing we've seen before. as you look at the way certain debts have been treated in other cases for example, in the brazilian brady plan brazilian banks have their own process. they took no haircut. they took a reduction, but they took no haircut. the logic for that in the way is understandable because if you haircut the domestic banking system you have another hole you have to fill and so forth and on it goes. this is one thing which given

the debt structure in puerto rico which is going to have to play out and see. i thought it would be useful to think for a moment on a comparative basis about the policy tools available in the two cases. in greece we have esm resources may be running out because the conditionality is not being met. that is one of the interesting things. what is the conditionality were enforced that mechanism in europe and what is it going to be in puerto rico. at the moment for puerto rico, there is no bankruptcy system. but one could imagine a d.c. control board.

that was real policy adjustment enforcement and puerto rico is also an article i territory. it is governed by the congress at the end of the day under our constitutional scheme. they will be back and forth about the terms and conditions between puerto rico and the united states but one could imagine this type of the solution and heaven knows there is a big home rule movement but with a d.c. control board put in, even jesse jackson said this isn't going to be so bad. it might further the cause of statehood. so who knows in the puerto rican political discourse how this will play out. that might be a possibility. in europe on the other hand you know the classic no adjustment

no money and that is the impasse we are in now and which we will be playing now. in europe we have the emergency liquidity authority that was just discussed in puerto rico. we have the fdic. there are some different mechanisms they are. theoretically we have srm in europe now the single resolution mechanism except in greece if in greece has not been put into domestic law yet so we don't know how that's going to play out but at the moment doesn't positive. how can each country restructure if it has to restructure? in the case of puerto rico there is no chapter nine.

even chapter nine might take care of a number of bubbles you've seen. it is not clear to me that chapter nine takes care of the geo-data. in may take care of the electric company and the like but not necessarily the geo-debt. that make you think something like the control that is more in mind and a framework for private-sector negotiations. how are you going to get consent from the holders? puerto rico is exempt in the trust indenture you don't have to get a 100% vote unanimity as a matter of statute. by contract you may well need 100% in most cases. in greece now for private debts we have collective action clauses and they retroactively

retrofitted the debt to include an aggregation feature. we don't have that in puerto rico at this point so that is an interesting one. then we have the different constitutional frameworks. in puerto rico and the state contract despair. the u.s. constitution also the puerto rican constitution. that is a provision that says no-space shall pass a law. but there is a bankruptcy power in the u.s. constitution and that is what is being invoked when people ask for the extension of chapter nine. but it does not come with chapter nine. the bankruptcy chapter could be more wholesome if deemed appropriate. i'm not necessarily advocating not that is the constitutional possibility and the tools that

might be available. the interesting thing is the debt service comes before salaries and pensions. this is like an interesting problem if you think about the greek situation at one point people were saying the bondholders get haircut as well have a claim under european human rights convention. you could record for two years and get denied in a court in luxembourg but it's a claim not into domestic law and public international law there is a doctrine called the doctrine of necessity that comes down to who decides whether money is allocated for teachers firemen doctors, debt service. who knows how that was going to

come out. argentina has tried that one. it hasn't worked very well. the puerto rican constitutional provision may have some interesting questions there. and then i think we have the question of how is anybody looked at the amendment provision in the puerto rican constitution because it could be amended as well. at the end i think as i said the basic distinction is down to the fact in greece they do have their own legal system and so bonds, which are governed by forward lock on the other by florida mall may end up with one treatment and obligations which are governed by local laws may end up with another treatment. doesn't sound terribly fair but that comes down to the sheriff.

puerto rico as i said is all within the u.s. legal system so we don't know with certainty how it's going to work but there is a higher probability that some of the dedicated revenue streams which have been pledged might actually be honored as such. but if there is an overriding that grips the solution coming from the u.s. congress, that debuted by the wayside and will be the usual domestic bankruptcy negotiation type situation. i think i will stop there. we could talk about how the debt-to-equity conversions might work and structures for that but that is still down the road. thanks. >> thank you. thank you to all the members for excellent and extremely

well-informed presentations. i would like to give all of the panelists a chance to comment on what somebody else has said or expand on something you'd like to do. two minutes max and we will go down the road here and see what you might want to add. >> one thing that struck me as it seems like everyone has slightly different debt economy figures. we would expose the gross national product for puerto rico. puerto rico taxes the actual manufacturers. in fact, they have increased those taxes. not sure if you've ever heard of monty python impression of the perfect tax, but that is a tax levied on all foreigners living

abroad. so we used the gross domestic product to and we would also i think not necessarily you and compares them with greece using federal and we wouldn't federal debt instead of puerto rico good they could defend another point that i'd like to raise is just on the data structure. it is very unclear what is going to happen. the fact for puerto rico courts invalidated the restructuring act which was their version of chapter nine they are not pushovers for police and fire

versus bad although the expert patient and his holders come to essential services probably would come summer blow. >> banks, alex. i would agree with the last point and that the bondholders had come out on the shirt. but that is how you get haircut is. i think in both cases one of the things that is always hard if an investor is to put yourself in the place of the people that are in these crises day-to-day in puerto rico or in greece. i got a note from a friend who's leaving for greece on friday, doesn't want to give up the tickets. he scared here he's taking three kids and a wife to greece. the mother-in-law can't get on a added the bank. you were seeing crises build up.

the average greek person they look at it as an attack on our culture, not as an attack on their finances. it is an attack on what they have had all along. if you are a teacher in grades come a u.k. 12 to 14 months maternity leave. what happens is people have lots of kids because basically you can go five years six years and work only six months and get paid double time through. that's an extreme example. the idea is if you've had this a long time it is what you are used to. in puerto rico when you look at a great point made by an urge about the differences in wages.

here you have the minimum wage in the u.s. is a burden to private industry in puerto rico given what they can pay. however, if you look at the vast amount of people employed by government in puerto rico, it substantially higher. that's almost a two-tiered system. the higher system no one is willing to shrink and they haven't been willing to shrink the holy. the structure in 2006 on the start of this subsidies. those are the changes you have to change the mindsets. thank you burt. >> i just want to make one point that was raised about the mobility comparison between puerto rico and greece. while it is true that

theoretically greeks can move very freely without the european union and practice labor mobility is not so great in europe either for the ballistic reasons for qualification reasons are housing reasons you don't have the kind of movement u.k. from puerto rico to the united states. that really changes one aspect of the puerto rican situation and that i don't think this is just an issue between the puerto rican government and the creditors. i think the united states has also got to play as to whether or not we want to have more people come into the mainland whether we want to have more wealth payment that we've got to make the puerto rico.

>> thank you. when i take a look at this and the remarks, it occurs to me we have two fundamental problems that have to be solved. one is the debt restructuring that has to be done in both economies and the other almost tougher job is to economic restructuring of the economy's going forward. they put this in a semi-villages of moralistic sense. the debt that has to be restructured effectively reflects the cost of the sins of the past public policy. economic restructuring needed is to prevent sins in the future. the question is is the moral strength to not only deal realistically with the cost of the sins of the past but also a much tougher job of trying to prevent future that name in terms of unproductive economic

policies. >> whitney. >> thank you. i think as i mentioned at the end of my main remarks, it may be one of the title is employed which might make a contribution in both areas and the adjustment area and also in terms of helping to solve the financial problem might be the possibility of using the debt-to-equity conversions. we can think of the electric company that needs to be restructured that it has a very high cost structure and other external policies as well that might be looked at to help the situation.

that is a time-honored way of dealing with excessive dads and if you can take the current cost of electricity in puerto rico in 20 cents per kilowatt hour and bring it down to the average united states mainland of 10 to per kilowatt hour that would be a nice boost for the economy. >> thank you. >> one other point i would like to make is the upcoming budget for puerto rico they have implemented a significant increase in the sales tax which i believe would have an effect on the economy. also to the extent, not saying it would have been would have been the near term but if payments to pensioners were ever cut would also have an effect on the economy. said even though they've been kind of flat lining right now there's other things. the one your since 2006 and had

a slight increase was following the tax guides, but it also led to some huge fiscal deficit. trying to catch the tail by closing the deficit can also have feedback effect on the economy as an increase. >> thank you. i would like to add three comments myself on this before we get to questions than answers. a lot of what we've talked about makes me think of john maynard keynes who is a great weight as well as thinker. it's an absolute then it to which any society will sacrifice itself for the bondholders. this is true it gets to the point john was making and others how much sacrifice for the bondholders. if you build them which as far away as when you run out of

other people's money as i said before the system stops and then we get to very important point of who's the sheriff. and good times we don't worry about the sheriff. only push comes to shove we worry about really the huge issue. i'm going to let you talk in a minute that but i want to give my third point out which is in historic american financial crises when the banks would stop payment as they called in those days, which meant you could go to the bank but you couldn't draw out your gold something very interesting happened. now we have the greek banks were stopped payment. in historical cases people invented money to keep functioning. local merchants would issue of notes redeemable or the local

establishment would get together to issue local currency which people could use. it would be interesting to see if things don't start happening today. and greece to replace the state funding withdrawn. one comment and will come the questions. >> you made an important point about what people will sacrifice for the bondholders. there is another important aspect and that is to what extent the people today make sacrifices for the future for people in the future that's highly problematic too. >> thank you. ladies and gentlemen, let me remind you how questions work beautifully for the microphone so you will be recorded for all

those who watched this on the aei website. tell us your name and affiliation and then ask your question. i know many of you will wish to make statements that are going to have a strict limit of one minute to get your question now. i will start here that little workaround. the >> so subtle investment corporation. one observation is the chart is very telling because the inflection point in that was 1933, which is in the u.s. left the gold standard. if greece wants to grow nominally disassembling thick which is late the hero. assuming that happens because i think it will my question to the panel and specifically to whitney but desmond and others may want to weigh in as well in

the official debt restructuring how do you see the imf credit playing out specifically on all the rest of non-european board directors go to the europeans and say you have to make us whole. utrecht is into this. they committed way over our heads. and it will happen quite quickly. the mac >> yes as i pointed out that the sheriff issue in the question of seniority, there is no surer seniority for the imf. it is de facto. the only way you protect that is by not over lending and one could argue the first package for greece was three-part imf for a price europe but when it moved to the second phase commit

dsk change that to one part imf for two part 0 and the current mp thinks that with excessive and the third package is back down around the 10% level. the question outstanding is whether it was too much and whether they are going to suffer as a consequence. i assume even if greece reestablishes its own currency that it may still want to remain a member of the imf and certainly there will be ways this lookup worked out in the true seniority as the imf will hold. i think he posted in your question the possible need for others to make a contribution to make sure that happens.

>> if i cannot do that that, this may be a situation where the imf deliberately for the way things played out has overcommitted itself and they have really done some serious long-term damage to its autonomy that those who ultimately signed are going to play tighter reins on the kinds of commitment it can make. >> a question. we will go on to the next. wade over here. >> thank you. wayne abernathy with american bankers association. have a question for anyone who wants to comment on it. one of the cornerstones of the basel capital of liquidity machines a sovereign instrument are better than gold. they've taken care of the great exception to put that to decide. unless we assume greece and perhaps puerto rico are anomalies should we be

concerned about these regimes that are going to increase exposure of the global banking system to sovereign instrument and capital and liquidity. >> i have never been a fan of the basel treatment for government debt. that basically reflected the conflict of interest that exist because atkins says of representatives that their national government. hopefully with enough of these catastrophes that there will be some serious rethinking of the extent to which government debt is given a free ride so to speak. this may be the situation that leads to the fundamental rethinking. >> this is supposed to be a problem dealt with around 2012 but that certainly hasn't been

the case. you've seen a lot of the countries in the european periphery at the spanish getting their bags to buy the bonds so we do have a massive problem of the interlink between the sovereign banking system. i am also surprised this has been extending quite as much money as to the greek banks at around 110 billion a lot of that is greek sovereign bonds and how solid is collateral that is. >> if you are a government, one of the main purposes of the banking system and a central bank is said they will buy your debt. right here, please. and then i will get to you. go ahead.

that will come as to you sir. >> tim rattler voice of america. i specifically as possible, what is the most likely way for greece. what is the most likely way forward for puerto rico? >> grace will have to exit the euro. i don't see how they can stay with it given all the structural economy and if they do the e.u. make it resell. that may be the tougher issue for the e.u. to address. it is kind of step for better or worse within the structure of the united states and so it will have to see some significant debt restructuring assisting the great "financial times" chart a very complicated multifaceted

and go through with the cooperation of the united states congress to make very significant structural reforms and one of the key problems is the minimum wage they are subject to. >> i will call on you as someone who actually buys arms to make these double predictions as well. >> just quickly on greece from a legal point of view. the treaty of lisbon is out of the hero. the country can choose to leave the hero but can't get kicked out. on that point, the problem mr. tsipras has missed 80% of the great population wants to hold the euro right now. so it is going directly and what would occur alex referred to that the greek government will soon be running out of money. what they will be doing is

paying people with the pensioners wage earners corporations will be paying them with ious. we will go through a phase of two currencies effectively circulating in greece. one of the hero, the other the iou and that might be a transition way down the road to be exiting. >> john, predictions? >> one thing but desmond said of the united states illinois has been doing that the last few years. they have been paying vendors and ious. it used to be you could go to a bank and get a discount and get paid. you have to take them and get paid a year later and they do them in order. so i agree. as someone who buys bonds and manages bonds and risk come you

always say are you getting paid for the risk. i would say of the insured that as we are very sure we are getting paid, we are getting significantly paid well for 5.5 to 6% tax-free yield which is a 10% equivalent where you have the resources pay back the answer is yes. the uninsured debt no. what is also interesting and you made the point that the capital markets in the end are your friend and you can't disregard them to the point where you don't have future access down the road. images inside point is if you went if you meant if you went back and we saw pictures of the great depression. in this country you actually had about 1700 municipal entities go

bankrupt and actually include the state of arkansas which is self made payments to localities and towns so they wouldn't go bankrupt so the state took the head. the good part about this is almost all of them except to feed a small towns in oklahoma that really blew away all the other municipal entities in the united states ended up repaying their debt in full down the road after the changes in the economy got better. it tells you the restructuring that goes on now don't mean permanent removal from the capital markets it doesn't mean in the long run you are not paid back. >> thank you. gentleman here. thank you. >> brain theory, washington correspondent. there may be a simple answer to this but i've always wondered why a country like japan can

house for years and years 240% debt to gdp ratio and asked the question if japan were going to default and 180% is a huge figure but it's still a lot less than 240% of workers 80% is a lot less than 240%. >> that is right up your alley. >> that is something that does keep me up at night wondering if it doesn't make much sense. privately for demographic reasons you are getting the aging of the populations said japan had high saving rates domestically. they had a flood of oppression in the banking system and institutions are forced to buy a they are not dependent on foreign bondholders. they've got something like 10% of their bombs owned by

foreigners. going forward the concern is that the population ages they will become more dependent on foreigners and this is a party that can't go on indefinitely that i was told there was a plaque on the wall saying how many traders had lost their jobs by jean short so it's not a good idea to short the market yet. >> thank you. >> one great point is very lots of hedge funds that shorted the japanese government 10 year bond at 2% famous as low-level and the hedge funds are in huddersfield. the other part was last year japan sold more adult diapers and diapers and that tells you all you need to know about

demographics. >> we still have a question appeared. >> wait for the microphone, please. >> the question power very quickly. i agree that obviously puerto rico has a high probability of default event. i still haven't heard anything from the panel about why they need to default or restructure. we had a dramatic shift from willingness to pay being the focus to willingness and puerto rico. the facts are not in a country in my memory and i've been involved in a lot of these come has ever restructure the debt gdp ratio above 40% with an average maturity of 25 years with an average interest rate of 5% with a current consolidated

fiscal deficit below 1.5% below 1% is projected for this year. it is a willingness to pay and it's a group of creditors including the insurance companies willing to put $3 billion in its bridge financing. we also observed countries would suggest -- >> excuse me, you had your minute there. i'll take the question if anyone has comments on willingness to pay. maybe that one is for you. >> i'm not the economist on the panel. >> that's why you get the question. >> i may be one of the few people in this room has represented cybernetic time they declared a moratorium in weeks

later thought better of it. i think that the question of adjustment and the economies is really paramount because that really has to do with the ability to pay and there have been references here to cultural limit and things like that. in some societies they pass the hat in people put in their personal gold so the country can pay its debts. we don't see that happening in either one of these two cases. so there is that dimension. i think one of the reasons to supplement my earlier response about the imf in seniority is the imf and offenses in part be useful for server. we have a utility in along with

the enforcer will also have some financing role and people will find a way to do that. what we need nhk's is a mechanism which helps for borrowers see how they can make the way forward. we talked about script. when i was in government they were told to go home and think about it when they manage to digest. they did raise taxes. i know that well as a partner in a law firm with operations in california the marginal rate is quite high and not necessarily growth inducing. the difference is california had an underlying economy with power and potential. the question for these two economies is really they are economically so inefficient.

how can we help them make the adjustment? >> you have to be very sure. >> the key thing is bond structures and entities. we take a look at the utility specifically. it is independently financed. it has serious financial problems. the debt is a prime candidate for restructuring. i can imagine it will get held up by the puerto rican government. but i would just repeat what i said before that could be a question of the ability to pay. depends on how much the country needs to do and a currency union. the lessons we've learned from greece is a country to do a major fiscal adjustment within a currency union generally is not a good day to you because you will tank the economy further and this is in a condo

structural problems ready that is declined in all you do is accelerate the downward death spiral. >> elect that ability and willingness but in terms of ability in the short run there is no liquidity crisis right now. so that is serious or partly brought upon by the willingness to make adjustment to bring external investors. they are elements of both. >> eyesight hand way in the back. >> jim glassman. greece is a sovereign country. puerto rico is a territory of the united states. how much culpability does the white house and congress have in the puerto rican situation? this is not a big surprise.

they been writing about this the last year and a half and yet there has been no response at all from the administration or from congress. >> okay, how guilty is the u.s. government? >> i would think very guilty in terms of nonaction over the last five or six years when it has become pretty clear they needed help. really since the late, there is this no bailout mentality in congress. except in this case it is their responsibility. in my opinion it's been a total abdication of responsibility and that isn't necessarily bailout. that is involved in a territory that reports to you. it has nothing to do with detroit. it has nothing to do with harrisburg, pennsylvania. this is congress' problem and

it's high time they got involved. >> this is just typical of how congress operates. with the crisis back in the 80s the crisis was emerging through the 80s but it wasn't until we had a change in administration in 1989 and was to the wall much more than puerto rico. i cannot expect us to act in a timely manner. they don't act until there is an actual crisis. puerto rico is not there yet. >> r. rating does not have any extra support. neither do we anticipated. >> wait time for for one more question. i haven't had one for this idea. >> jerry chandler. what's the difference between

puerto rico and hawaii? why was hawaii seemingly successful than puerto rico was not? >> at the very different culture between the two entities. the other thing to keep in mind is number one hawaii has been able to maintain their military presence was cut back. the other thing is why is the state and puerto rico is in a limbo land and i think that is a factor also. >> we could talk about this a long time and i expect we will some more, ladies and gentlemen. thank you for coming. let's show our appreciation for announced the name. [applause] [inaudible conversations]

>> as this program comes to a close come if you missed the discussion you can see that our video library. go to c-span.org. ..

>> new jersey governor chris christie is expected to make a campaign announcement. is expected to announce that he is jumping in the race for president also making in the 14th republican candidate. you conceding us that live on c-span and address them or through open our phone lines and take your calls, reaction to today's announcement. join the conversation on facebook and twitter. >> persistency tour is partnering with our cable employers over travel across the united states. join us this weekend as will about the history of the life of omaha, nebraska. >> omaha had a reputation in the african-american community in omaha and in the united states

as a city debt when he came in if you are black you needed to keep your head down and needed to be aware that you were not going to be served in restaurants and were not going to be able to stay in hotels. when the club began the operation, the idea and affect the term term civil rights wasn't going to use the term social justice because civil rights was a part of the idea of civil rights was so far removed from the idea of a greater candidate of omaha or the united states that they were kind of operating any backing. i always like to see her operate without a net. they were not to support groups, not have prior experience of other groups to challenge racial discrimination and segregation. >> we look back to the union pacific and how the do construction of union station health omaha economy. >> the union pacific is one of the premier railroad companies of america. it was in 1862 with pacific

growth act signed into law by abraham lincoln. it combined several railroad companies to make union pacific and then they were charged with building the transcontinental railroads to connect the east and west coast. they started here moving west and central pacific started on the west coast and was moving east and then met up in utah. that's really what propels us even farther. we become that point out moving west, one of the gateways to the west. >> see all of our programs from omaha saturday at noon eastern on c-span2's booktv and sunday afternoon at two on american history tv on c-span3. >> recently texas republican congressman and house armed services committee chair mac thornberry spoke at the atlantic council a his strategy for national security and defense. he outlined his life keys for

national security success and addressed the current state of u.s.-russia relations. he also described the nation is pretty picture he perceived facing the next presidential administration. this is just over one hour. >> good morning and welcome. i'm fred kempe, president and ceo the atlantic council. and thanks so much for joining us. you always know that we have a big deal just when we arrange our room in this fashion. that's the one give away. it's a privilege to mac thornberry, the chairman of the house armed service committee to share his prescriptions for american strategy from his vantage point on the congressional armed services leadership. this is one come as all of you know, this is one of the most important jobs on capitol hill and really in the united states. it's an honor to have you here and thank you for your service in this position.

today's discussion grows out of the councils expanding work on strategy and his defense policy and carcasses role in american foreign policy leadership. this work would not be possible without the support and vision of george lond and vice chairman of the brent scowcroft said on international security. you will be here just a little bit later on for your presentation. the atlantic council is one of washington's premier platforms for full range of defense and security strategy discussions. the commanders series with four-star generals, captains of industry series with ceos and defense industry, defense and social policies yourself all welcome an array of live from four-star generals, ceos service secretaries, acquisition chiefs to have the vision for their own organizations for the future of the country's security. we are delighted now to add this leading congressional voice to

this conversation so thank you, chairman thornberry, for speaking here today. is an important moment to be discussing your quote-unquote strategy for america and in a we are all the hear what you advise. the u.s. tackles critical challenges in europe, the middle east to south china sea. we were just talking about what about what an array of challenges we face all at the same time. and you can't really decide how to prioritize these challenges they don't have a real strategic view. brent scowcroft for whom we have named the scowcroft said on international security year which is hosting this event, tells us often that during the cold war over time on develop the strategy content of the soviet union containment of the commons ideology in the world and the tactics were any complaints -- any complaints now too much tactics and strategy. we devote ourselves to redress the and you help us do that here today, chairman thornberry. we believe the country needs a

strategy driven budget and not the other way around. at a time when our countries challenges seem to be growing, congress wrestles with intense budget constraints and where the united states consequently decides to invested in the future is going to help right our defense and security strategies at home and abroad. this strategy effort works across the council. we have a strategic foresight initiative looking 20 30 years in the future, long-term trends to identify opportunities that challenges. we have a middle east strategy task force co-chaired by secretary albright and steve hadley. looking at the challenges across the middle east. then we have the george lund in urgent defense challenges initiative looking at the intersection of business and industry. so we are delighted that chairman is here this morning to tell us what he and his committee already doing and but for the needs to be done. writing recent of america's strategy toward the defense

budget, chairman thornberry cautioned quote without a course change history's judgment will be harsh, and rightfully so. i'm not going to hand the floor over to vice president atlantic council, the director the brent scowcroft said on international security, very powerful who has a lot of experience in these fields himself. before i do that i have to make the most important announcement that you get an introduction like this and that is our twitter hashtags. so you can use the account at ac scowcroft and were using hashtag pc defense. thank you very much. the floor is yours. >> think it very much, fred come and to do very brief introduction to conservative want to hear from congressman thornburgh as fred said the scowcroft center is focus quite a bit on the longer-range mobile security trend with a particular attention to the emerging challenges that could become become

tomorrow's headlines and may not be fully appreciated. chairman thornberry focus on the same athletes a house largest committee to ensure our military and other defense institutions are adequately prepared for the challenges of today and tomorrow. very often most important battles discussion about topics of today in the future but it's important to you directly from our leaders a child want to solve the problem we face and the strategies that we will need to deploy the chairman thornberry and mips a former pentagon official, has been at the forefront of many of our public conversations about our most pressing defense and secure the challenges and i'm sure he will do so again. it's my honor to introduce chairman thornberry today before speech and the subsequent discussion generally looking forward to. chairman thornberry has been in government for quite some time. he worked for five years as a capitol hill aide for texas represented tom lepper and they became the chief of staff for

represented larry, another texan republican. in 1980 it became a deputy assistant second state legislative affairs and the reagan administration. after taking a break from politics to work in a law firm hoping when his family's cattle ranch which i imagine help to develop some similar skills for working in our legislature, he won the race for the 13th district of texas to become its representative, a district he has diligently served since 1995 and january he became the chairman of house armed services committee, the first texan to assume this position and he has made his mark by congress on the most important issues, some the longest standing challenges including this acquisition reform, other aspects of military reform, how can the united states maintain its technological edge and a number of the other important issues in the headlines which include russia, isis and asian defense challenges as well. once again we are really honored to have you with us today and we

couldn't afford to your remarks. thank you very much. [applause] >> well, thank you barry come and i appreciate the chance to be here this morning. i am very grateful for all the atlantic council has done over the years to help shape our security policies. we need clear, realistic, thoughtful thinking about our national security challenges now as much as we ever have. far we have had to witness after witness come before us on the armed services committee and say we face more serious complex national security challenges now than we ever have. at least since the end of world war ii. i think this emphasis on looking ahead and trying to see the

bigger picture is something we just don't need in all branches of government. so i certainly abroad the council's emphasis on that while we grapple with a day to day and getting passed and so forth. we are also trying to keep a list one i focus on the longer-range. but we need your help of course it's also true as you look ahead you have to look behind. so a lot of time and effort has been spent marking the 70th anniversary of the end of world war ii. it's interesting the thrill of victory of 1945 soon gave way to more somber realizations that we face a different kind but very serious threat as we moved into 1946. it was a remarkable time because we learned the hard way that consequences of withdrawal and weakness in world events, and

now we had to navigate our way through this new role of being the indispensable world power and all the responsibilities that entails. looking back from the perspective of 70 years there were two well-known warnings which were given to us in early 1946 that seen from this perspective even amazingly prescient but also perspective. i think they continue to light yesterday and the new face of tyranny that we confront here as this audience well knows, george kennan had clashed with spirituality about the realities that were driving soviet russia. but in response to some inquiries from the state and the treasury department in february february 1946 he cabled back his famous long telegram. in it he wrote at bottom of kremlin's neurotic view of world

affairs is traditional and instinctive russian sense of insecurity. they have learned to seek security only in patient but deadly struggle for total destruction of rival power never in compacts or compromises with it. been less than two weeks later a foreign politician been in opposition came to the united states and gave a speech which shook up public opinion about our former wartime ally and winston churchill told an audience in fulton, missouri, which included president clinton i do not believe that soviet russia desires war. what they desire is the indefinite expansion of the power and doctrines. from what i've seen of our russian friends and allies during the war i'm convinced there's nothing to admire so much as strength, it has nothing for which they have less respect than for weakness, especially military weakness.

of course those insights among others help guide our policy in the cold war and to the soviet union collapsed i think most of us who grew up during the cold war knew that our country and although we cared for and believed in were threatened by this entity that would only find security in the total destruction of its rivals. after the soviet union collapsed most of the also thought and hoped that without the ideology of communism, russia would enter into the community as a constructive responsible participant just as churchill and stalin churchill and roosevelt were misled by stalin, we've been disappointed and perhaps we underestimated something deeper in the russian psyche that george kennan was pointing out pretty clearly. so despite warning signs as the obama administration took office they took a different approach toward russia than that recommended by kennan and

churchill. vice president said within the first month it was time to set the reset button and send the separatist it was off with an actual is mistranslated button. later that year the president canceled the third inside missile defense plan, surprising our allies, poland and the czech republic. next year the president announced he concluded the situation in georgia no longer needed to be considered an obstacle to reach agreements with the russians. of course there's the famous incident with the microphone with the president was advising that he just needed a little more time to get past his election what he needs more flexibility. meanwhile, while all of that was going on we begin to cut our defense spending. a new government in ukraine that doesn't want to live under moscow's of him leads to an invasion and annexation of

crimea, invasion and occupation of participating in many ways though significant breach of european borders since the end of world war ii. we don't dealt with that with economic sanctions and some training exercises but so far the administration and some of our european allies have refused to provide the ukrainians with the lethal excesses that they've asked for an order to defend themselves. lenin is often quoted as saying if you encounter mush democracy to give you encounter still, withdraw. well it seems that mr. putin and those around them to see economic sanctions and training exercises as steel. so what's happening today is the russian defense budget is going up by about 10% despite those sanctions, while limits on strategic launchers and warheads are equal under the new s.t.a.r.t. treaty. rush is modernizing both with new icbms and new long range cruise missiles among other

things. all the meanwhile they continue to crank out new nuclear warheads and maintain an advantage on practical warheads, about 10 times what we do. russian military openly discusses changes which show a broad and just other of the circumstances under which they just nuclear weapons. to continue to be in violation of the inf treaty and of course, we have seen these aggressive actions with planes and ships that we never saw during the cold war. in addition they are launching a massive and relentless misinformation campaign, not on internally by two neighboring countries. if one visits eastern europe you hear a lot about that. even on the political front media reports evidence russia helped finance green protest and anti-fracking movements in europe while providing employment for former european officeholders. a common topic of this year's munich security conference was

hybrid warfare which is a blend of tactics and deception designed to hide the faces that you make it to complicate the responses of an antiseptic the russians are not the only ones using these tactics but they are particularly problematic for us. in summary the next president will have sitting on his or her desk a situation in which the one country that could pose an existential threat to the united states has growing military capabilities, and increased willingness to use them a string of provocative actions and outright aggression along with brazen deception as a matter of government policy without much of an effective response so far. my point is that just one of the national security challenges that's going to be on the next president's desk. is truly daunting. what should we do? in truth in advertising, 535

members of congress are not going to devise or implement a national security strategy. dustup with the first branch of the government can do. what we can do is help clarify thinking, enlightened public opinion and ensure the next president has all of the tools he or she will need in order to defend the country and protect our interests around the world. i suggest that there are five elements that are key for us to focus on over the next several months. number one, speak the truth. historic changes after world war ii came about because kennan churchill and others were willing to speak the truth. domestic political calculations and spend are too often the enemy of the truth. americans and others need to know the facts about russian involvement in ukraine for example. i also think americans tend to undervalue the battle of ideas.

we seem to take it seriously during the cold war but whether it's the struggle against radical islam or against european aggression, the fight for the truth to be heard is especially important in a network world among other benefits this let alice know they're not in this by themselves. we need the organizations, the capabilities and the political will to fight on that battlefield, and we are not doing very well at this point. secondly, we need to strengthen our defenses. data starts with how much we spend. as was mentioned in next years budget is the subject of the pride of political maneuvers on capitol hill and in the white house these days. both the house and senate the senate passed budget resolutions and the defense authorization bills that provide as much money for defense, exactly as much money for defense as the president requested. the chairman of the joint chiefs

has said this is the lower ragged edge of what is needed in order to defend the country. and yet the president has threatened to veto either the authorization or the appropriation bill, or both, unless he gets more money for some domestic programs such as irs and the epa. last friday the president told a group of mayors that i will not sign bills seeking to increase defense spending before addressing any of our needs here at home. history has a way of turning iron into tragedy because today sector a defense of carter is in europe working to bolster the nato alliance commitment to spending more money on defense into stiffening spines against the russians. and he does that just as the president is holding hostage our

own requests, his own requests to increase funding for defense. my suggestion is nothing would send a stronger signal and to bolster secretary carter's message than for the president to agree to sign a defense bills with the money that he asked for. increasing money in the oco account is not the ideal way. we need higher consistent predictable funding but holding defense spending hostage for the epa is not a way to achieve that and it certainly does make our country safer. the fact is defense spending has been cut when you get the effects of inflation 21% in the last four years. the world i hate to tell you is not 21% safer than it was four years ago. charles krauthammer is simply noted the decline is a choice.

we have a choice right now to meet the lower ragged edge from what it takes to defend the country over to play politics and end up with significantly less than is required. i think this choice is going to say a lot about what the next 70 years looks like. as far as how we spend that money to strengthen our defense, our nuclear deterrent requires special attention. this week our committee is going to have a hearing to deputy secretary gee the deputy said defense and the vice chairman of the joint chiefs to focus on this topic. we are spending about 10 days in classified and unclassified sessions just looking at our nuclear deterrent. it is the foundation for all of our defense efforts. i think we have taken for granted assistance to the infrastructure and the people that keep those complex machines safe, reliable and effective. the weapons and the delivery

systems are all aging out at about the same time and are going to have to be a major priority for the next president and for congress. in tight budget is always attempting to shave off all the other research and development funding. tight budgets and cost institutional to become more protective for keeping what they got. need of those temptations helps us to meet the challenge of your competitors. deputy secretary work is leading a push known as the third austin strategy to stop the further erosion of american technological superiority. that is an effort i think that is both important and urgent. few defense systems at uncertainty and complications the two adversaries planning process as much as missile defense. few defense systems help reassure our allies as much. expedited put on both technology

and fielding exists systems on missile defense is needed. finally, a new domain of warfare, cyber, poses special challenges for those of us who value the rule of law. but the threat is growing faster than we are able to deal with and i don't worry much about our technological ability or expertise our ability to keep up. went away but is our laws and policies are not keeping up. and that is also an area for not only money but time and attention. the third key i think for our future is to improve our agility. so we need to make sure that the resources we spend on defense are spent wisely and more efficiently, and that is part of the reason you see such an emphasis on defense reform coming from both the house and the senate. can be even more important than spending money efficiently is that we have to approve the

agility of our system. to be blunt if you continue to take us 20 years to field a new airplane, we will never keep our technological superiority over allies. over adversaries. while they are certain the trends that we can see such as the increasing importance of cyber, there is much in this volatile world that we cannot see. so we have to be agile enough to respond to the unexpected. and rigidity is our enemy. whether the rigidity is in bureaucratic organizations, and military strategy and tactics or in our procurement systems over our political decision-making. this year in the house and the senate we are focused on the acquisition reform, on reducing overhead, and on personnel reform. it's a start but we all have to

put our heads together to ensure that our defense systems are as agile and they need to be in the world where the threats move literally at the speed of light. the fourth key to me is to stand strong with allies. while the united states must have the ability to defend ourselves on her own from is preferable and more likely we will do so with allies, whether it's in europe, asia or the middle east allies must pull their share of the way. the fact only for nato allies are meeting the 2% of gdp targets is not only unfair, it is probably seen by moscow as further evidence of mush. the u.s. has to lead by example which is part of the recent our defense budget are so important, and stop the decline in our own budgets. but we have to demand that our allies meet the targets for theirs as well.

we also have to give those willing to defend their country against aggression the means to do so. both the house and the senate defense authorization bills provide such authorizations for legal assistance for ukraine, for example. it's disturbing to see some people here and in europe want to sit on mount olympus and make judgment calls about who was worthy and he was not worthy to defend the country against invasion. look, it may be that if the ukrainians receive additional lethal assistance that putin will up the ante. but they still have a right to defend themselves. and putin will pay a price in increasing casualties, when he is very nervous about paying. i think we also need a concerted effort to look at what works and what doesn't work with our training and equipment effort.

without successes and failures. one of the projects our committee will look at later this year is to look at both and try to learn the lessons from what works and what doesn't. we will have to work with allies in a variety of places around the world, and we need to understand how we can better enable those allies to meet their security challenges your fifth and last and got to make sure we is all instruments of national power. in 2007 i served on the commission on smart power whose recommendations were largely a matter of common sense before they got denoted into the lyrical realm. we need the full range of capabilities and the judge -- judgment of which told you. secretaries have become some of the songs advocates for funding of other government agencies. and yet the day-to-day frustrat