having ongoing operating deficits. they are projecting this year in the last disclosure statement about 190 million offering deficit for fiscal year 2015 even though the 2015 budget was balanced on paper. we feel there's operating implementation risks. even if they 2016 balanced budget is enacted on paper we feel there's still implementation risks. i can go into some of the details of that if the panel discussion gets into it. ..

so the federal tax breaks we are are sure to mainly in him him and is rarely or local manufacturers are high-value industries. to the extent those aren't even that their small amount of employment has a big impact on the gross domestic product. so here's some quick points in comparison with greece. puerto rico is the territory within the u.s. government and the u.s. house of representatives but they can't

vote in the congress. greece is a full member of the area. puerto ricans have labor mobility within the u.s. the brain drain out of puerto rico. there is labor mobility for greece within the e.u. in terms of currency, puerto rico does not control of its own currency with the u.s. dollar. whether greece has control or not they have representation at the bank. the economy isn't very well synchronized with the earth as a whole. fiscal transfers is a big point of difference. about 24% 25% of personal income comes from fiscal transfers to the u.s. government

the biggest fiscal transfers social security but there is also medicaid, medicare, food stamps veterans benefits many things in there. that provide some support. furthermore, if you think within the u.s. federal system u.s. citizens don't care if new jersey pays more than alabama into the federal government. there is not a huge groundswell of opposition necessarily for making payment into puerto rico. greece on the other hand it limited fiscal transfers and custom transfers her near a period in terms of economic growth or decline puerto rico has had to. that decline that they are not nearly as much. greece from 2010 to 2014 at the

decline of puerto rico. in terms of debt it is hard to look at. we look at debt ratios. generally states not including underlay municipalities electric systems, enterprise systems supported by the state general fund. some of the numbers we saw in the earlier site and may take issue with. look at a different way to make it comparable with grace. if you look at overall electric systems, it's about 69% of gdp. if you look at its faith in our view would be closer to 40% but for greece, i have met data of 180% now. incomes in puerto rico are a lot higher than increase, but still low by u.s. standards. lastly we look at the impact of

the default by there may be more debt increase. you could say government held it may be less impact on the debt markets as a whole were puerto rico debt is privately held. now hedge funds are a major share it may be less willing to give per se negotiations with puerto rico. they have to negotiate their restructuring. perhaps there could be a greater impact on the u.s. market. i think my time just ran out. >> thank you very much. john. >> thank you, alex. >> good morning.

my role at cumberland in terms of free energy in bonn for all he does is really driven by two things. returns on investments of course and preservation of capital. so when i view things in puerto rico intentionally greece has impacts across all bottom interest rates as we saw yesterday, i am doing it from the perspective of risk reward capital preservation. if you go back basically a gear and three quarters to go to the end of august 2013, their bearings cover really started the run on puerto rico -- and the uplifted yields that we have seen since. it isn't that the problems weren't known before that. they were. most of the bond market knew that. what you have in days mentioned at the end of this piece they

are ways that you had a tax-exempt bond market in the u.s. broad participation by retail investors in puerto rico debt because of the double exemption from it or not only federal taxes that state taxes and all 50s dates. not only did you have direct retail ownership, you have large retail ownership across the numbers of municipal bond funds that own puerto rico debt. when the barings article ahead immediately you started to see selloffs in the puerto rico bond market and it lasted right through the following january march and this kept going since. you started to see selling of bond funds into a market that classic quiddity. republic of some of the yields in a second. this was the match that lit the

fire. we are looking at kofi net debt. the sales tax dead you can see it as jumped up even higher than the sealed now. we will see some charts. one of the great things as alex mentioned at the beginning of this is coming on board on this day when both puerto rico and greece hit the fan over the weekend. take the deck of cards and presentations, throw them in the air and see what you have left. kofi net debt traded at low levels for many years and even after the first barings pc. the reason for that was the seventh two debt -- >> is that the green line? >> the green line right. >> just hope the audience out.

>> january last year it jumped and of course this may and june if this were outdated you would see at even higher up to the 14% level. this year and we think this will have this will happen as puerto rico is going to try to essentially grab the sales tax revenue and claw back to the common law whereas bondholders have always expected they get first claim on the sales tax. we will see whether this happens, but there is certainly the fear factor now that the protection of the bond holder with a lien on the sales tax is going to be attacked. here is the geo-data. it is important to look at the comparison here. in our view where we have exposure to puerto rico is only insured puerto rico debt.

bad as buy to a t. shirt guarantees and mbia. we own it specifically fair and started doing that for select clients in march of 2014. so this is after yields had risen. the interesting part is that the news covers in puerto rico through the fall you can see all three, both insureds as well as the uninsured -- grows. so one is the actual line for triple-a securities, the gray line. the blue line is the ensured puerto rico bonds ensured puerto rico bonds in the green line is the uninsured. the first four months everything goes up in the vacuum and you see the markets start to discern the difference between uninsured bond ended uninsured on.

and if they diverge. you can see the ensured yields we started giving up all then at the 6.5% to 7.5% level worked their way down to five and jumped a little bit yesterday to a few pieces that there weren't enough trade to hang your hat on. it's interesting how the markets start to dissect things. either way, if you look at a pattern of chicago's geo-dad insured ursus uninsured, it exhibits the same pattern and they are all collected in an upward yield draft right now every fully expect that to be sorted out. one of the things we look at where the insurers and the reason we are in all fairness we believe the insurers have plenty of capacity to pay any puerto rico claims. remember the bond insurers obligation is to pay principal

and interest when due. the fact is you may have a bond in 2035 where there is possibility of default or nonpayment. the present value of that is much lower. as we saw in detroit the bond insurers were originally offered 15 cents or 20 cents on the dollar. they ended up settling for 80 cents on the dollar. they have lots of clout in terms of getting restructurings died and we believe this will be ongoing in puerto rico also. sales taxes to show you the senior versus the lord made they really got clobbered yesterday because obvious lee they think it would be callbacks, that will be the first hurt. the electric authority. dave mentioned possibilities of restructuring. again, insured versus uninsured.

the gap is usually applied. we fully expect to see some restructurings in the highway authority. the markets estimation is 70 cents on the dollar will be the new power. that hasn't started yet. to my knowledge the july 1st payments are in the bank and can be made. tomorrow everybody should be getting paid. the governor goes on tv and says we cannot pay our debts. there's a difference between the cannot pay our debts and we don't want to pay our debts. one of the real issues and the crux of not only the insurers, but also the hedge funds that got involved. you saw hedge fund involvement come around my spring. most of the hedge funds signed a nondisclosure agreement with puerto rico so they can get access to data and basically

have targeting chips and returned for logging more money. the nondisclosure agreement means they more or less have more information and it means they cannot trade with anybody else other than themselves. i'm not sure that is helping right now because they wanted to go to puerto rico and say we will lend you more money. puerto rico wants none of that and that includes reducing payroll, cutting benefits, and better. puerto rico does not access to chapter nine bankruptcy. they would like to fast-track congress to allow that either directly grant them access to chapter nine are fast tracked into statehood and they would be eligible and that is not happening. the interesting part of it even if they had chapter nine they be required to show they've taken steps in all the steps necessary to try to pay their debt than they would need to be close they

are. it still has a long way to play out. a little bit here on the crisis. government debt he was 90 of gross product. economic weakness, shrinking manufacturing david touched on this large unfunded pension liabilities relative to revenues. the story is not good. here is the reason we like to puerto rico insured that. guam has a higher underlying rating in puerto rico but not much. there's a u.s. tourist area. we have puerto rico insured and they are trading 200 basis points apart. that would be if he saw some trades would be closer to 250 today after yesterday. when you look at the insurance agreement to both bonds he reads exactly the same. so why is one trading 2% cheaper than the other.

the answer is simple. it is headline risk in the market discounts headline risk by giving you higher yields. this is true in this case. what we think is eventually things come together. most of this is you don't have the retail participation. right now you see any of the major brokerage terms investors could go in the bible on the insured payer. as soon as everything hit and not too many more months, most that the major brokerage firms threw down the barn door and said we will not let our clients buy any more puerto rico paper. this is after yields have risen 200 300, 400 basis points or more. after the horse left the bar and they said he can't buy anymore. we actually think it was close to getting the petroleum tax deal done. if they had gotten that done

you would've seen the insurers take a piece of that because of the way the tax of a dedicated. if the brokerage firms like the morgan stanley and mouse of the world had got involved in the dealer would be very hard to tell clients that can't buy the ensured puerto rico deal. arafat is an retail is selected by you see them come back in the u.s. will decline. way here kind of gives you an idea of puerto rico g adapters of its population. detroit would have been a similar looking grass. 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 the puerto rico whether barnett may issue the last a year ago march they came 2035 at a discount of 93 cents on the dollar to yield

875. you can see the price of the bond has declined and it is really declined in the last few days whereas it had been trading 76 cents on the dollar a week ago and is now down to about 60 4 cents on a dollar, 65 cents on the dollar yielding well over 12%. the real question now is we note the electric and highway authority will most likely have to restructure. the question is the common law going to have to restructure. when they brought the deal together, $3.5 billion in march 2014, all you heard from the government was to go debt pledge to puerto rico is sacrosanct and will continue to make good on payments and keep you up to date on progress reforms. you haven't seen any of that and

the problem with that of course is of course the lack of communications is reflected in the dollar price of the bond. personally and i'm not speaking for the firm here. i find that hard to imagine the united states leading a u.s. territory go under. it's not like this charade for the state of michigan. you have puerto rico pouring into the united states. if i'm a holder of u.s. debt china, an ideal billions and billions of dollars in agencies and mortgages, if you're leading a u.s. territory go under what is next? fannie mae freddie mac sallie mae? the united states needs to get involved a little more here. quickly run through this. some of the other yields on date you can see skyrocketed. this will sort itself out but it is clearly getting very wide.

credit ratings dave touched on this have been clobbered. with the kites yesterday, the next stop will be at default. i just thought i would bring us up since we're talking about about greece as well. you can see this is now greece and puerto rico are basically trading at multi-digit yield. the interesting part is the yield curves themselves. here you have a very flat yield curve but it's actually negative which tells you the beginning as people are wanting bigger yields than they want in the fire years, which tells you the markets, even though it's a huge discount are expecting the solution down the road as opposed to a default which never

stops. the new restructure companies start paying once again. this is puerto rico spraying last year versus now. you can see the huge uptick in yields. greece now versus follow 14. again a few months ago great paper was trading 6% in a heartbeat of his back in a love in. markets adjust quickly both up and down. >> thank you, john. desmond. >> thank you very much, alex, for arranging this. what i want to do is i want to talk a little bit about the similarities and differences between the greek and the puerto rican situation.

i thought i might start with quotes from the great russian economists leo tolstoy who said all happy families are alike, but each unhappy family is unhappy in its own way. i think what we've got is to unhappy dysfunctional economies that are unhappy in their own ways. some of the similarities both if you look at the debt numbers and gdp outlooks, you've got to come to the conclusion that both have unsustainable debt levels and they are both in a currency union, but they might have got there in a different way and i would get into that in a moment. both are in economic down spyros but there is a difference between the greek and puerto rican down spiral.

puerto rican balance by row looks more like a secular problem for structural issues driving down to high labor costs were too high electricity prices were not competitive market where as the greek case was a situation of a cyclical move because they try to do too much budget adjustment than a fixed exchange rate system and they learned 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 this is a lot more serious than the case of puerto rico considering the difference in the structural debt that i will get to in a moment. and of course the question of the systemic fallout. in the case of greece the systemic fallout could be a lot more serious because what they

could do in time is to spread contagion to other troubled countries in the european periphery like portugal spain italy and then we could really have a systemic problem. i don't think that is the case in puerto rico that if you get a problem in puerto rico is going to be upsetting for the municipal bond markets but i don't think it goes much beyond that. and the shovel as we look at a puerto rican event in close proximity so it might not be easy to sort these two out. let me talk now just briefly about the unsustainable debt position that if we just work at the numbers, greece is already quite alarming that greece debt

to gdp ratio has gone from 100% to 180. i might remind people that is after a massive breakdown in the privately owned debt the 75% net present value write-down of 150, $200 billion of greek deaths in 2012 so it is quite an achievement to get a debt to gdp level that high. puerto rico's dad which is just a better metric for that i've mentioned before has gone up close to 100% and what really strikes me is how progressively it goes up as the radius suggests a something that is not sustainable and constantly rising will mean you've got the deficits in the government corporations coupled with slow

growth keeps pushing the debt ratio up and that is a party that has to come to an end. there are similar underlying causes to the two problems but the difference is greece was a prophet to see was made possible by very low interest rates when they joined the euro interest rates converged to european levels. german and french tanks fell over themselves to lend to the greeks. there is no budget discipline. they pay the budget deficit around 15% of gdp about 2010 and.com is to a crashing end. puerto rico the situation is a little different that i think what has facilitated this is the fact is that tax-free status on the bond that makes it attractive and the markets in

their wisdom go financing an unsustainable position until it ends. what is really impacting both debt levels is the fact the economy is already declining in a big-time way and the pace of greece is really impressive. just take a look at this chart. this chart is comparing trajectory of greece's gdp since the crisis began around 2092 it 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 a significant upturn. greece brought it down to where we were at the low point in the great depression and given the events in greece right now i don't think you got to be a

phd economist and that they are taking another body blow in the debt decline will continue going forward and obviously that makes it difficult in terms of getting the debt dynamics stable. if we look now which i think the chart is rather enlightening is this compares puerto rico to greece and we are looking at it from roundabout 2005. that is where they start. greece is the blue line. puerto rico does somewhat too great here. puerto rico was downed over a ten-year period. talking about something like a 15% contraction in gdp. that doesn't make good for the way in which you're able to repay your debt. obviously they gdp is on quite a different project to read.

now 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 because the greek economy if they get out the euro, they have more flexibility and policies. puerto rico is having a problem. everybody is leaving puerto rico. i understand right out the more puerto ricans in mainland come the united states and the island and they keep leaving at the rate of 48,000 a year and who is leaving at 25 to 44-year-olds and who is saying the elderly people, not that i've got anything against old people, but the young people need to support the old people. so from a demographic point of view it looks like somewhat of a disaster. that may be of concern to the united states.

let me talk about the challenges to both economies. i think that is really very important and the lessons are required learned from the great crisis. the truth of the matter is reset before his both of them are stuck in a currency union. what this means is if you try to do a lot of budget adjustment and whichever way you do it what that tends to do is produce this aggregate demand and you can't offset with euro monetary policy. so greece tried to do a massive budget adjustment collapsing. the reason i'm not too take on puerto rico and the reason i would share the view that this country has got a real debt sustainability problem is that if they try to raise taxes and cut spending to quickly and do all the rest what they will do

is taint the economy even further, get people to immigrate to mainland and ambitious not an acquire bowl proposition to have the debt repaid. if i could just talk briefly on the debt structure because this has relevance in terms of how this is all going to get resolved. if you look at the greek data structures some 316 billion euros i now work at one euro equals a dollar but that might be going forward. you've got a huge amount of debt that is basically all officially owned. a lot of it is to the europeans a chunk to the ecb the imf. it really depends what the official creditors are going to do and the official creditors

what they do is push out the maturities, reducing interest rates that are too wide at all. you can't bring down the effective debt to gdp ratio that way because the maturities in your chart is equivalent to raising the debt off and that the way it will go. puerto rico is a different kettle of fish. it gives you a notion there's many different pieces and it's got revenues pledged here in different claims they are an awful lot of different interests. i wish the governor a lot of good luck in trying to restructure the debt. of course you don't have the bankruptcy court so that makes it difficult and might take with you can't look at the individual

pieces because if you do something on the electricity prices, that might have an impact on the other foreign policy and might make the holders of the electricity bond happy, but it's other bondholders because what you do is impact the way in which the economy works. the last po mentioned before is the fallouts from the dead default the greek case i think you could have very serious long-term relatively optimistic short-term and this time around in 2012 europe is in a bunch better position for greece to support the countries in the periphery of the european stability and a hundred billion dollars in the european central

bank has a printing press and now seems to be happy using the printing press by and 60 billion euros bonds a month. if there is contagion of any serious means mr. druggie will come up with another statement and back it up with action that will stabilize it. long-term difference jewelry. if greece leads the euro majority change the picture of the way in which europe works that the elite membership irrevocable is no longer in play. italy has the debt to gdp of 100 dirty 5%. it's got no growth to speak out. it's got political problems. that is going to be a lot more difficult but that is down the road. as i said to conclude, puerto

rico i don't want to minimize the fact is that $73 billion in debt. put that into perspective and understand the detroit bankruptcy with 7 billion you talk about 10 times the size. this might be a wake-up call to bondholders and high yield market that there are risks when the fed starts raising interest rates this might not look so pretty. thank you. >> thank you privilege desmond. bert. >> thank you alex. i'm here to discuss a very troubling situation. if you move to my side. the big question is puerto rico america's greece. i would say yes and no cannot talk about that as i proceed. first of all it is important as

others have talked about to differentiate the political status. greece is an independent nationstate is still highly dependent financially on the e.u. it is important to keep in mind there's always the possibility greece could exit the european union and this increases if it abandoned the euro. there is a close tried with continued use of the euro as its currency. so looking at puerto rico, we have a very lambeau like situation here where puerto rico have some broad and hard to break ties with the u.s. first of all puerto rico residents are u.s. citizens. puerto rico has a dollar and of

course enjoy substantial subsidies in terms of cash flow to the federal government that the tax exemptions on the debt issues talked about with and puerto rico citizens don't pay u.s. personal income tax. the full independence or maintenance of the status quo over the years has a lot of debate in puerto rico about what the long-term status should be but all of that of course is unresolved at this time. again coming back to a point made earlier that the situations are different because of their current political status and puerto rico's difficulties are u.s. problems in the week raises problems not an e.u. problem because greece could leave the e.u. puerto rico is hard to imagine leaving the united states. it is kind of assess whether we like it or not.

in terms of the similarities and differences, first of all either one has a competitive economy in the global sense and in both cases operate with an overvalued economy, sluggish economies, high unemployment and burdensome regulations puerto rico of course has been losing population. i don't know what the population situation isn't great but it's hard to imagine it is attracting many folks these days given these problems. both are heavily subsidized by what i will call their parents commit the u.s. and e.u. and finally come to very high to gdp levels. here of course we see a chart as to how the greek government debt to gdp has risen up to now close to 180% driven not only by increasing debt is also

declining gdp and that is likely to continue to be the case in greece. it is interesting to note the european union established a debt to gdp ratio of 60%. not that it's not that i thought it very often, but with so establish some time ago. greece is at three times the level which gives you a sense of how far out of sync the debt to gdp ratio is relative to what the e.u. objective is. he seen this chart already. i apologize for the background. both desmond and i have to attribute to the "financial times" published about a month ago. again, one of the things that is interesting for a relatively small economy it has incredibly complicated convoluted structure which greatly magnifies problems.

in terms of differences, greece is receiving lots of subsidies. a lot of it is an ad hoc nature and politically contentious. the subsidies are hardwired through statute and as someone said earlier they didn't seem to be much controversy about that such as the thought that tax exemptions enjoyed. arguably the favorable tax break puerto rico that gets in terms of federal statute exempt from part of the recipients is exempt from federal, state and local income taxes across the country. this is seen as a benefit for puerto rico that arguably is working against puerto rico because it made it so cheap to finance debt relatively speaking that incentivize puerto rico to take on even more dead that is

now a burden for it. i will talk a little bit about banking systems. one important thing to keep in mind is banking systems and what shape the banks i read do reflect what is going on in the economies in which they are operating. with the greek banks which we will have a list of in a moment they've largely been kept afloat in recent months to what is known as the emergency liquidity authority which has basically lined a lot of money to the greek banks to fund a huge deposit occurred. the deposit outflows i would argue have longer-term negative effects on the greek banks and therefore i'm the greek economy as it tries to recover. here's some numbers on the banks

had ordered inquiries. these are for the banking group which includes their operations to two deposits. if i could just point out we see this and the bottom of 207 million euros as at the end of last year. the funds supplied under the emergency liquidity by my calculation have essentially funded an outflow of 45%. to 50% of those deposits. 93 billion euros have been advanced in this gives you an idea of the magnitude of confidence greece and the greek banks has boss. i didn't put up net worth. they reported positive capital positions at the end of 2014 and as a practical matter the banks

are insolvent and that would be a longer-term challenge going forward. what is interesting about the puerto rico banks as they are part of the fdic. the banks and deposit are assured by the fdic in the same way mainland eggs and of course the fdic is funded by deposit insurance premiums that all banks pay. we look here at the banking system and puerto rico. you have four banks listed here that were puerto rican headquarter and then we have numbers on non-puerto rican banks operating with citibank to being a major participate. and scotia bank is a canadian parents. you'll notice number one these

are the numbers that says the end of june 30 last year. develop banks failed in january this year. in fact, puerto rico is at substantial number of failures over the last four years. the number the lower right-hand corner, $6 billion is the amount of estimated loss the fdic has taken in those failures. this is a subsidy from u.s. tanks being paid to protect depositors and are not an insignificant amount of money. in terms of lucky not to puerto rican banks in addition to having the fdic deposit protection which is not no one on the banks puerto rican banks can borrow if they need to from the federal bank of new york. some of the banks have borrowed heavily and consequently the puerto rican economy will not be

held back by weak banking system as is the case that will likely continue in greece. part of my voice. in my opinion, muddling through is not an option. the approach has been taken at this point in time because the debt burdens have become intolerable. you can only go so high it meant something has to happen. consequently creditors will take haircuts. the only question is when, how much and what the mechanism will be for that. taxpayers will bear some losses, it do. what are greece's realistic options? one is abandoned at euro and that might need the e.u. but if it keeps the euro has to dramatically reform its economy. there's just no no option other than doing that. let me just touch a bit on who wins and who loses.

first of all there'll be huge balance sheet gains or losses depending what the net euro position is. anybody agrees to haven't been on every possible euro they could and put it in a mattress or bank account in another country was foolish economically. if greece switches back to the draw, those folks will enjoy a substantial gain. but now that the banks are closed it is too late for that option. that is why greeks holding your if greece abandons the euro. greek debtors will gain debt denominated in euros is reached and nominated and this'll be a huge legal issue. there's some interesting parallels here with the u.s. abandoning the gold standard in

1933 greeks might learn some lessons from not. the question is which euro denominated debt to the records them for us or not enforce. this is an issue i have not heard any discussion about but it will be very controversial i believe if greece in fact does drop the euro end quote back. but the big losers will be nonfree creditors and that of course will include taxpayers. puerto rico very different situation. first of all it's much less likely puerto rico was advertised in abandoned u.s. dollar. therefore the question of what are the options for puerto rico since the evaluation by abandoning the dollar is not an option. basically it has to make it a more attractive economically and with her discussion about that. there has to be a substantial wave of privatization.

puerto rico is a socialist economy compared to the mainland u.s. and a key candidate is probably the electric utility which is inefficiently operated company's substantial capital investment. classic situation with appropriate adjustments would make sense. the other thing is puerto rico is stuck with the u.s. minimum wage. that is the very nature negative in fact on the competitiveness of puerto rican weber. unfortunately that's an action congress would have to take. for those of us who are not fans of the minimum wage, the puerto rican situation provides an excellent illustration of why minimum wages are negative for economy and particularly the

least employable folks in the workforce. finally the big question is what is the mechanism and this is where the chapter nine bankruptcy debate comes into play. there's a lot of evidence in puerto rico ought 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. my gut sense is that could have been pared puerto rico has to find out other ways to go through debt negotiations with creditors. think argentina. with that i thank you and look forward to her discussion. >> thank you burt. whitney. >> thank you very much.

it's a pleasure to be here and talk about this comparison in greece and puerto rico. i think we've heard by now pretty well what the nature of the problem is. in each case we have a large debtor in a currency union without economic growth had with the non-competitive economy and lots of structural impediments in the economy to grow large fiscal deficit and many structural issues in the public sector finance. basically in a currency union, as i once heard sara at a church that england would never join the euro, with the fiscal policy ltd. my monetary policy set in frankfurt, my only adjustment tool is politically unacceptable. here we have situations where

economies confront an internal devaluation which basically means unemployment wage depression and so forth. they have to confront the situation. it's also been made by adjustment which seems to be happening in both cases. the previous speakers have talked about the dimensions so i won't really care repair. when the debt to gdp ratios get to the size they are, something is not right. mention has been made of the question of the composition of the debt. the composition of the debt as desmond lachman indicated that the key question going forward. why is that the case? we see here a situation where we

do not have a classic central government that and one or two publicly owned agencies. we have a very complicated system of theoretical seniority created by pledges of various revenue streams. i think the legal question which we may end up getting any of their two is going to be the modern version of the question that was asked of allen dulles when he testified in the house of representatives being examined by abe fortis in the 1930s about the bolivian tobacco revenue bonds issued in the 1920s. he was asked about the enforceability of the covenant pledging the tobacco revenues and a sort of spider to

boilerplate boilerplate. well there is perhaps a potential difference and this is what we will see. in the case of the bolivian tobacco revenue bonds, there is no share a phone that bondholders could call upon to collect those tax revenues and say they are out. 30 or 40 years before that it was still considered good form to send the gunboats downed and he collected duties until the bonds are paid. after the convention of 1907 which outlawed the use of force to collect debts the option disappeared. here in puerto rico within the u.s. legal system there is a judge. there might be a sheriff and

it's going to be very interesting to see whether the different pledges that discrete revenue streams will be honored by whether there is going to be a genuine equitable mosh in which it is all linked together heard about that way. so that is one big distinction that i see with the greek situation. it is not at all clear what happens with the composition of the greek debt at the moment, which as is pointed out is a largely public sector. so again it is no longer good form to send the military to collect the debt. if we are talking about ecb talking about bilateral debts,

talking about eib dads who really has seniority. what about the imf. there was one very interesting statement that was made when they started to create these mechanisms in europe. they said the imf a senior and we are next. again who is the sheriff says this dollar goes first to the imf and then the dollar goes to someone else. i know when the restructuring was done in greece, there were many private on holders who wring their hands in what was the special deal to eib god or that the ecb got. for those of us who've been around that restructuring that was a movie we've seen before. if you look at the way certain

debt has been treated for example in the brazilian brady plan, brazilian banks have their own special process then they took no haircut. they taken mpv redaction, but they took no haircut. the logic for that in a way it's understandable because if you haircut the domestic banking system and you have another hole you have to fill and so forth and on it goes. but anyway, this is one thing that given the debt structure in puerto rico which is going to have to play out and we will 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 or policy adjustment in person at mechanism in europe and what is it going to be in puerto rico. at the moment for puerto rico there's no bankruptcy system. one could imagine a pc control board. that was real policy adjustment enforcement. puerto rico is also an article i territory. it is governed by congress at the end of the day under a constitutional scheme. there will be some back and forth about the terms and conditions of the compact

between puerto rico in the united states. one could imagine this solution and having his there is a big movement in the district of columbia. in the d.c. control board was put in 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 may be a possibility. europe on the other hand you know the classic ftp no laundry, no adjustment, no money. that is the impasse we are in now and that we will see play out. in europe, we have the emergency liquidity authority discussed. in puerto rico we have the fdic. there are seven different mechanisms they are.

-- bear. theoretically we have srm the single resolution mechanism but it has not been put into domestic law yet. we don't know how that is going to play out but at the moment it doesn't look positive. how can each country restructure if it has to restructure. in the case of puerto rico there is no chapter nine. even if we had chapter nine that might take care of a number of bowls on the famous chart you see. it is not clear to me that chapter nine takes care of this go debt. it might take care of the electric company and the like but not this go debt. that might lead you to think

something like the control board is more in line and a framework for private-sector negotiations. how are you going to get consent from the holders. puerto rico is exempt from that trust indenture acts they don't have to get a 100% vote unanimity as a matter of statute. but by contract you may well need 100% in most cases. ..

but there is a bankruptcy power in the u.s. constitution, and that is what is being invoked when people asked for the extension of chapter nine. but it doesn't have to end with chapter nine. that bankruptcy power could be more fulsome if it were deemed appropriate. i'm not necessary advocating that but that's the constitutional possibility. we are talking about the tools that might be available. the debt service apparently comes before salaries and pensions. this is i think an interesting problem. if you think about the greek situation, at one point there were people who were saying if the bondholders get haircuts we will have a claim under european human rights convention.

soslid through to greek court for two years and you get tonight and did you go to a court in luxembourg and you present your tree decline, but it's a claim of international law, not domestic law. there's a doctrine called the doctrine of necessity and so then it comes down to who decides whether money is allocated for teachers, for firemen, for doctors, for debt service. and who knows how that one is going to come out. argentina has tried that one and it hasn't worked very well. but the puerto rican constitutional provision, we may have some interesting questions there. and then i think we have the question of has 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, a basic distinction is going to come down to the fact that increase they do have their own legal system -- in greece -- so bonds which are governed by four law, other obligations governed by four law where there's a foreign forum may end up with one treatment and obligations which are governed by local law may end up with another treatment. doesn't sound terribly fair but that comes down to the sheriff's problem. and in puerto rico, as i said we are all within the u.s. legal system so we don't know with certainty how it's going to work but there's 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

bankruptcy solution coming from the u.s. congress, then that may be by the wayside and we will be in the usual domestic bankruptcy type negotiation situations. i think i will stop there. we could talk about a debt to equity conversions might work and legal structures for that. but i think that's still down the road. thanks. >> thank you. and thanks to all the members for excellent and extremely well-informed presentations. i'd like to give all of the panelists a chance either to comment on on what someone else has said or expand on something you would like to do one to two minutes, two minutes max and we would just go down the road and see what you may want to add. >> one thing that struck me it seemed like everyone at slightly different debt to economy

figures. we would use gross domestic product which is larger than gross national product for puerto rico. puerto rico taxes those offshore manufacturers. in fact, they prefer to tax those offshore manufacturers to residents and they've increased the taxes. i'm not sure if you ever monty python's definition of a perfect tax, but that's a tax levied on all foreigners living abroad. [laughter] so we reduce the gross domestic product, and we would also i think not necessarily use underlying municipalities in comparison with the greece. you are using federal debt. we wouldn't put federal debt into the puerto rico calculation. they don't pay federal income tax. there's a lot of differences i

could defend what we did. the other point that i'd like to raise i think on come is just on the debt structure. i think it's very unclear, i agree with what's going to happen, but the fact that puerto rico courts invalidated the restructuring which was their version of chapter nine indicates that they're not going to be pushovers necessarily for police and fire versus debt although i think the expectation is that holders if it comes down to essential services probably would come somewhere below. >> thanks. john? >> thanks, alex. i would agree with the last point that dave meant come is bondholders come out on the short but that's how you get

haircuts. i think in both cases one of the things that's always hard it's hard as an investor, which result in the place of the people that are in these crises day today in the island come in puerto rico or in greece. i got into a note from a friend who is actually leaving for greece on friday and doesn't want to get the tickets and he scared. he's taking three kids and wife. his wife is greater than the other law can't money out of the thing. the atms have run dry. so you're seeing crises build up up. but the average greek person according to my friend they look at as an attack on the culture, not as an attack on the finances. it and attack for what it had all along. so, for example, if you're a teacher increase, you get depending on how long you've been there, you get 12-14 months

maternity leave. and as he said what happens is people have lots of kids because basically you can go five years six years and worked only six months out of those and get paid the whole country. that's an extreme example, but the idea is you that is a long time, it's what you are used to. in puerto rico when you look at i think great point that was made by i think bert 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 that are employed by the government in puerto rico they are paid substantially higher than minimum wage. so it's not almost a two-tiered system. it that higher tiered system that nobody is willing to shrink come and have not been willing

to shrink the whole way through. when they needed to start shrinking it was absolutely in 2006 when they started losing the corporate subsidies. those are the kinds of changes yet to change the mindsets. >> thank you. bert. >> i just want to make one point was raised about labor mobility making comparison between puerto rico and greece. while it's true that theoretically greeks can move very freely out in the european union, in practice labor mobility is not so great in europe either for linguistic reasons or for qualification reasons or housing reasons. you really don't have the kind of movement that you get the

way we are getting from puerto rico to the united states. i think that really changes one aspect of the puerto rican situation in that i don't think this is just an issue between the puerto rican government and the creditors do i think that the united states has also got to play as to whether or not we want to have more people come into mainland whether we are wanting to have more with welfare payments that we've got to make the puerto rico. >> thank you. when i take a look at it this listening to the remarks of others, it really occurs we are two fundamental problems that have to be solved. when his a debt restructuring which has to be done in both economies. and any other almost tougher job is economic restructuring of their economies going forward. if i could put this in a

somewhat religious or moralistic sense. a debt restructuring and a the debt that has to be restructured effectively reflects the cost of the sense of the past the public policy sense. the economic restructuring that is needed is to prevent sins in the future. and the question is is the moral strength there to not only deal realistically with the cost of the sins of the past but also to the many ways much tougher job of drawing to prevent future seeming in terms of -- sending -- in terms of unproductive economic policies. >> whitney. >> thank you. i think that as i mentioned at the end of mine main remarks, it may be that one of the tools which can be employed which might make a contribution in

both areas, both any adjustment area and also in terms of helping to solve the financial problems might be the possibility of using the debt equity conversions. we can think of is electric company that needs to be restructured that it has a very high cost structure and there's some other external policies as well which may be looked at to help that situation. but that is a time-honored way of dealing with excessive debt. and if you can take their current cost of electricity in puerto rico at 20 cents a kilowatt out and bring it down to the average in the united states mainland up 10 cents a kilowatt hour, that will be a nice boost for the economy. >> thank you. go ahead dave. >> one other point i would just like to make is for the upcoming budget for puerto rico they

have implemented a very significant increase in the sales tax which i believe would have an effect on the economy. and also to the extent, i'm guessing it would happen in the near term, but if payments to pensioners were advocate would also have an effect on the economy. been an assistant out of the woods yet for the economy even though they've been kind of flat-lining right now. there's other things. the one year since 2006 when he had a slight increase in the economy was following some tax cuts but also led to some huge fiscal deficit. so trying to catch the tail by closing the deficits can also have feedback effect on the economy here as i imagine in greece. >> thank you. like to add three comments myself on this before we get to questions and answers. a lot of what we have talked

about makes me think of a saying of john mader james who is a great with as well as thinker -- john maynard keynes. he says there's a limit to which any society will sacrifice itself for the bondholders. this is a true. that gets to the point john was making, and others, how much sacrifice for the bondholders. if you have built a whole system, however, which for its very functioning depends on ever increasing borrowing from the bondholders, when you run out of other people's money, as i said before, then that system stops. and it would get to whitney is very important point about who is the sheriff. of course, in good times we don't worry about this year. it's only when pushing comes to shove in that we worry about the sheriff and in all these cases this is really a huge issue. i'm going to let you talk in a minute but i wanted to get my third point out, which is in

historic american financial crises when the banks would stop payment, as they called in those days, which make you go to the bank but you couldn't draw your gold, something very interesting happened. now we have the greek banks under government orders have stop payment. what could we expect to happen? in historical cases what happened was people invented money to keep functioning. you had local merchants, for example, would issue notes, t-mobile in good or groups of merchants or you could go to the local establishment would get together to issue their local currency which people could use. it would be very interesting to see things like this may be to start happening, say today. trying to to replace the state money which has been withdrawn. bert, one comment and then we'll

come to questions. >> you made an important point about what people will sacrifice for the bondholders. i would say there's another important aspect of sacrifice and that is to what extent will people today make sacrifices for the future, for people in the future? i think that's highly problematical, too. >> thank you. ladies and gentlemen, we will come to your questions. let me remind you i see we have a lot of them. let me remind you how questions will work. please wait for the microphone so that you will be recorded for all posterity, speaking at the future, who will watch this on the aei website. tell us your name and your affiliation and ask your question. because we have a lot of questions, i know many of you will wish to make statements but i'm going to have a strict limit of one minute to get your question out. let me i will start here and then we will sort of workaround. yes, sir.

>> one observation, dozens depression chart is very telling because the inflection point in that was 1933 which is when the u.s. left the gold standard. if degrees want to go again not like there's a very simple answer which is simply leave a year. assuming that happen, i think it will, my question to the panel annika specifically to whitney but desmond and others may want to weigh in, you know s&p may want to weigh in as well. in the official debt restructuring how do you see the imf credit playing out? specifically, you know on all the rest of the non-european imf board directors going to go to the europeans and say you have to make us whole, you tricked us into this. we committed way over our heads. this is your debt. is that going to happen quite

quickly? >> do you want to start, we may? >> yes. will come as i pointed out with his sheriff issue and the question of seniority, there is no seniority for the imf. is a de facto. the only way to protect that is by not over lending. and one could argue that the first package for greece was three parts on enough for eight parts of europe, but then what about into the second phase, dsk changed that to one part imf for two parts of europe their candidate that the current empty thanks it was excessive. and in the third package it was back down around the 10% level. the question of standing still whether it was too much and whether they're going to suffer as a consequence. but i am assuming that even if

degrees reestablishes -- if greece reestablishes its own currency that it may want to remain as a member of the imf and that certainly there will be ways that this will get worked out and to seniority of the imf will hold. but i think your question, the possible need for others to make a contribution to make sure that happens. >> this may be a situation where the imf deliberately or just 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 find it are going to put tighter reins on it in the future to the kinds of me but it can make.

>> great question. we will go on to the next. >> thank you very much. wayne abernathy with american bankers assocation. not surprisingly i have a banking question. one of the cornerstones of the basel capital and liquidity regimes is that sovereign instrument are a better than gold. they think they're taken care of the great exception. i put that to the side but unless we assume that greece and perhaps puerto rico are anomalies, should we be concerned about these regimes that are going to increase the exposure of the global banking system to sovereign instrument both in the capital and in their liquidity instruments? >> i have never been a fan of the basel treatment, very favorable trigger for government debt. that basically reflected the conflict of interest that exist because basel consist of

representatives of the national government. but hopefully with enough of these catastrophes that there will be some serious rethinking of the extent to which government debt, particularly national government debt, is given a free ride so to speak under basel. this may be the situation that leads to the fundamental rethinking. >> this one was supposed the problem is going to be dealt with roundabout 2012 but that certainly hasn't been the case. that's what you've seen this you've seen a lot of the countries in the european periphery, beat anti-incumbent the spanish getting to banks to buy the sovereign bonds. we do have a massive problem of the interlink between the sovereign and the banking system. i'm also rather surprised that the ecb has been extending quite as much money as they have to

the greek banks, the did not take a stand is right about 110 billion a lot of collateral is greek sovereign bonds which i'm not quite sure how solid a collateral that is. >> desmond, as we've discussed before, if you're a government one of the main purposes of having a banking system and a central bank is so they will buy your debt. yes, writer, please come and then i will get to you. >> that's all right. go ahead. go ahead and then we'll come to you and then up in the front. go ahead. >> voice of america. two quick questions for bert your as succinct as possible come what is the most likely way forward for greece? what is the most likely way forward for puerto rico? >> my belief is that greece will have to exit the euro. i just don't see how they can stay with it given all the

structural problems in in the economy. and then if they do the eu may kick greece out. that may be a tougher issue for the eu to address but i think with regard to puerto rico it's kind of stuck for better or for worse, within the structure of the united states, and so it's going to have to come number one, see some significant debt restructuring as we've seen in a great financial times chart it's going to be very public hated, multifaceted process and then had to go through with the cooperation of the united states congress to make very significant structural reform. i do think against one of the key problems that cut his minimum wage they are subject to. >> desmond has a comment. and then i will call on u.s. of action bodies of these bonds to make a double prediction as to. >> just quickly own greece from

a legal point of view. the ruling of the ecb taking a look at the treat of lisbon is a country can't get kicked out of the year. that country can choose to leave the euro but it can't get kicked out. now, on that point the problem he has is that 80% of the greek population wants to hold the euro right now. so the chancellor is going directly. what would've occurred is what alex refer to is that the greek government would soon be running out of money so what you'll be doing is they will be paying people whether $13.95 plus shipping and handling our wage earners or corporation they will be paying them with ious. we will go through a phase where we have two currencies effectively circulating increase, one euro, the other ai are you coming might be a transition way down the road

spent john predictions spent add one thing to what desmond said, here in the united states illinois has been doing that for the last two years to they have been paying their vendors in ious. it just be that you could go to a bank and get a discount on the iou and get bigger the banks will take the oh use so you have to take them and get paid a year later, and they do them in order and there's a pecking order to. i agree. as someone who buys bonds and manages bonds and manages risk come you always say are you getting paid for the risk. i would say can be insured that as we are very sure we're getting paid. yes, getting significantly paid well for 5.5 to 6% tax for you which is a 10% taxable equivalent where you know you the resources to be paid back, the answer is yes. the uninsured debt, no.

what's also interesting is and you made the point is 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 to capital down the road. an interesting side point we went back and saw pictures of the great depression. the great depression in this country you actually have to but 1700 municipal entities go bankrupt, action include the state of arkansas which itself make payments to its localities and towns so they wouldn't go bankrupt. so the state took the hit. the good part about this is that almost all of them come except for maybe a few dustbowl found in oklahoma which literally blew away, all the other municipal entities in the united states

ended up reading all of their debt in full down the road after they made changes in the economy got better. so it tells you that the restructurings that will go on now don't mean permanent removal from the capital markets and it doesn't mean in the long run you are not piggyback. >> thank you. right here. spent brian, washington correspondent. committee simple answer to this but i've always wondered why a country like japan can have for years and years t-1 40% debt-to-gdp ratio and rising and nobody ever asks the question, if japan will go into default. of course, 180% is a huge figure but it's still a lot less than 240%. puerto rico 80% is a lot less than 240%. >> does but a, i think that is right up your alley.

>> is something that does keep me up at night kind of like wondering if this doesn't make much sense, and i think that i would be concerned about japan partly for demographic reasons but if you look at japan's demographics which are getting is you're getting the aging of the population. such an used in a very high saving rates domestically. they had a lot of repression in the banking system. they were forced to buy japanese bought the they are not very dependent on foreign bondholders. they've only got something like 10% of the bonds are owned by foreigners. going forward the concern is that as the population ages they will be drawing down on their savings and they will become more dependent on foreigners and this is a party that really can't go on indefinitely. but what about the salomon brothers i was told there was a plaque on the wall saying how many traders have lost their

jobs by being short for japanese bond market. so it's not a good idea to short the market yet. >> thank you. go ahead. >> a great point, is there were lots of hedge funds shorted the japanese government 10 year bond at 2% think this is incredibly low level and those hedge funds are all in potters field. the other part last year japan sold more adult diapers and i presented think i told you all you need to know about the demographics. >> we still have a question up here. wait for the mic upon, please. >> part question, part state intergroup murder i agree with david, obviously puerto rico has a high probability of default event. but i still haven't anything from the panel about why they need to default or restructure.

i think we have a dramatic shift from willingness to pay from ability today being the focus to willingness in puerto rico. attacks are not any country in my memory, and i've been involved in a lot of these, as ever restructured with a bit gdp for issue below 40% with an average maturity of a debt of 25 years with an average interest rate at 5% with a current consolidated fiscal deficit below 1.5 below 1% as projected for this year. it's a willingness to pay. and there's a group of creditors, perhaps including the insurance companies which are willing to put about $3 billion in as bridge financing. we also observed countries would suggest -- >> excuse me. you had your minute.

i'm going to take the question as anybody have comments on willingness to pay. may be, whitney that one is for you. >> i'm not economist here on the panel, but i think that -- >> that's why you get the question. >> yeah, right. no, i mean, i may be one of the few people in this room who has actually represent a sovereign at the time they declared a moratorium, just outright declared it an of course six weeks later they thought better of it. i think the question of adjustment in these economies is really paramount because that really has to do with the ability today. there have been some references here, too, cultural limits and things like that. but in some societies they

passed the hat and people put in their personal gold so that the country can pay its debts. we don't see that happening in either one of these two cases. so there is about to mention. i think, you know, one of the reasons just to supplement my earlier response about the imf and its seniority is about the imf in a sense in part the useful enforcer. so it will have a utility along with its enforcer role will also have some dip financing role as a people will find a way to do that. i think what we need in each case is a mechanism which helps the borrowers see how they could make their way forward. we talked about script. when i was in government,

california came to the church, knocked on the door and asked for help at pivotal to go home and think about it more and they managed to adjust. it did raise taxes. i know that will as a part of the law firm with operations in california, the marginal rate is quite high that it's not necessarily growth inducing. i think the difference though is, california a basic underlying economy with a lot of power and a lot of potential. the question for these two economies is really they are economically so inefficient, how can we help them make that adjustment. >> of these have to be very short. >> key things about puerto rico particularly is a bit lots of different bond of structured and entities. some of those are revenue bonds. we take a look at electric utility specifically. it is independently financed. it has very serious financial problems. it's that they serve a prime candidate for restructuring and

i can imagine that prepa will get bailed out by the order began to put. >> averages repeat what i said before, is that it could be a question of ability to pay. it depends of how much a fiscal adjustment does the country need to do in a currency union. the lessons that we've learned from of greece is that requiring a country to a major fiscal adjustment within that currency can generate is not a good idea because if you're just going to tank the economy further and just with the chart i put up this is an economy that's the structure problems already put all your going to do is accelerate its downward death spiral. >> really short. >> ability and willingness but in terms of ability come in the short run there is no liquidity crisis right now. so that's your answer that's partly brought upon by the willingness to make adjustment to bring external investors. there are elements of both spent

i saw a hand weight in the back. >> jim glassman from aei. so greece is a sovereign country. puerto rico is a territory of the united states. how much culpability does the white house and congress have over come in the puerto rican situation? this is not a big surprise. some of us have been writing about this in the last year and a half and testified in congress committed there would have been no response at all from the administration or from congress. >> okay, how guilty is the u.s. government for puerto rico's problems? >> i would think very guilty in terms of non-action over the last five or six years when it is becoming pretty clear that they needed to. there's this really says 2008

lehman and aig there's just no bailout mentality in congress except in this case it's their responsibility. and so in my opinion it's been a total abdication of responsibility, and that isn't necessarily bailout. that's getting involved in a territory that reports to you. so it has nothing to do with detroit. nothing to do with harrisburg, pennsylvania, because they have state overseas. this is congress the problem and it's high time they got involved. >> this is just typical of how congress operates. after our analogy any s&l crisis back in the '80s. that crisis was emerging through the '80s but it wasn't until we had a change in administration in 1989 and the s&l industry's back was to the wall much more so than puerto rico that congress pilot acted. i cannot expect us to we should

not expect congress to act in a timely manner. they don't act until there's an actual crisis staring us in the face. puerto rico is not there yet. >> our rating does not assume any extraordinary support new do we anticipate it. spent we have time for one more question that i haven't had one from this site. anybody? yes, last question. >> you talked about past sins in futures and the what's the difference between puerto rico and hawaii quick wipe with a wide seemingly successful and puerto rico not? >> of course it is very different culture. between the two entities. the other thing to keep in mind is number one how wiseman able to maintain a strong support from u.s. military. puerto rico a lot of military presence was cut back. hawaii as a state and puerto rico is in this kind of limbo

land and i think that is a factor also. >> we could talk about this a long time and i expect we will samore, ladies and gentlemen. thank you for coming and let's show our appreciation for an outstanding panel. [applause] more booktv in prime time tonight here on c-span2.

>> some live coverage on our companion networks extensively about. in the afternoon former texas governor and gop presidential candidate rick perry lays out his economic plan talking about how to fight the quote cycle hopelessness and lost opportunity so many americans feel trapped in. that's life at 1 p.m. is tender president obama speaks about the economy traveling to the university of wisconsin are those remarks. at about 2:30 p.m. eastern. again that is life on c-span.

>> now a discussion with russian journalist alexei venediktov who the daily these calls moscow's last independent radio newsman. the editor in chief of the rear station echo of moscow talks on russian immediate end to political system as a result of the ongoing ukraine-russia conflict. russian citizens joining the islamic state and other issues. from the carnegie endowment for international peace this is an hour 15 minutes. >> alexei venediktov has just agreed, he would've introduction, i don't think you need much introduction it is truly a standout figure in the russian media and political landscape. he is one of the most i think insightful commentators about what is going on and rushed him what's going on internationally and based on his extended career, the station is observing a 25th anniversary so we are in the of kind of a jubilee.

in which apple is looking back but also for. was interesting come he was born in 1955 and he spent about 20 years teaching. i think about where students are today. it's a very different career path but in many ways, people were still students. i start my day tried to work every day, i'm listening to ekho and on the well i'm listening to ekho and is a filter of information. i would turn things over to our discussion. the filters are getting very confusing. we i think of anything of incredible instability and uncertainty of what's happening inside russia what's happening internationally. do you when you look at that level of uncertainty and unpredictability have a few facts that you keep reminding himself of? the want to keep reminding myself is that we are in a warlike atmosphere come at least inside russia. does it feel that way to you.

[speaking russian] >> translator: thank you very much for inviting me. indeed if we're going to take about the environment of instability prewar situation. when the war began everything becomes clear. the vision of my present an hour later, we have confrontation that will increase because russia and the united states of america. ukraine is a territory where the clash took place. still there is no direct clash between the citizens of brush and citizens of ukraine. i hope it will never happen but

not ukraine, not luxembourg, not france, not england. to me this is a territory of -- this issue will get worse. currently the united states according to the poll is any number one for russia. in 1970 to 1979 russia considered the united states its enemy. at the end of the cold war it was a 50%. our mentality is very militarized regarding you guys. [inaudible]

any sanction is the challenge. any statement of any journalist is seen as a challenge. that's what it is quite clear. so i don't know why. >> you spent a lot of time one on one or in small groups with president putin. one of the most striking stores i remembered hearing about is what he spent a difference to between an inning and a traded and he said you are an enemy. can you explain what he meant by that? [speaking russian] >> translator: it was the year 2000 president putin was only just elected. he came out i was just a

journalist. he came to a city. he met with us. [inaudible] he was very nervous. he was talking very fast to us. later he spent about two hours talking about media, and about what was going to happen. it was a philosophical conversation. at some point i asked him how do you classify your enemy? enemies, rivals, competitors, to categories.

there are photos and traitors. [inaudible] and then you divide what you conquered. then there is the war again. we look in their eyes and talking about traitors, people who were inside your team. struck him from behind. i have no mercy for them. that means, i ask them where am i in this category? he said you are just an enemy. it was almost like a metal. >> so who is barack obama? [speaking russian] >> translator: i believe that

he is a rival. he is a competitor. he is an enemy. and any american president is unrivaled in his black and white picture. [inaudible] but there is no element of truth in your. >> if you look at the dynamic where we are in now with her so much tension over ukraine tension over the sharp nationalistic turn in russian politics and the sharp isolation of russia from the international community, do you feel that this is a political strategy as much as it is the reaction to the events we had in ukraine and early 2014 with the overthrow of victory article which -- victor

yanukovych? >> translator: up with a confrontation between our nation was unavoidable. because we have common sense and we have contradictions between our countries. but there is a mentality and psychology of our president. i believe that currently president putin feels very confident. when he didn't back his ears he became young again. [inaudible] it was at this time of the cold war, it was the time the two superpowers fought him what to do and how to conduct. [inaudible]

relaunch, 18 very complicated and he didn't feel comfortable. i would not say that he did it on purpose. but the fact is that he understands he is the enemy -- [inaudible] temporary allies, it's very good for them and he feels much more comfortable. >> if you look at the logic of russian domestic politics, it's a little different. having an external enemy that justifies tightening the screws at home, that justifies a deepening of a monopoly on political authority over all of society, having this atmosphere is basically a formula for putin's political long-term survival. and it's hard for us i think to disaggregate which component of this is natural result of tensions over a situation in russia's immediate neighborhood and how much of this is about

the long-term political survival of the regime. how would you wait the two? [speaking russian] >> translator: it is a joke although sounds like a joke -- who can convert the foreign policy into domestic policy. i don't of any politician in the country of the 21st century who used his foreign policy, managed to converge the issue into domestic issue. but this is what we are talking about, the issue, the president and i go -- [inaudible]

what i disagree with is the fact the president goes -- everything else is a byproduct. we have eliminated -- our country is shrunk the political -- [inaudible] the moral rules are reduced to the traditional and. a president who belongs to the tea party. >> to deprive the congress of their authorities.

to deprive the supreme court of its authority. to abandon the traditional parties, to dance only certain dances and songs. that's what happened. doesn't mean the country is becoming come is turning into a nation which is not capable to compete? it is the right one, the official one. [inaudible] spent so what are the big goals

people are very much focused on the predilection -- i'm sorry. someone's headset is making a terrible static noise. can you all please check to see who -- all they all are. i'm sorry about that. i'm very sorry. okay. spin this goes off and as a result we have the static noise. if we could ask people to turn -- >> if you could keep headset awful i speak english we will not have this was going okay. so that's a technical fix. i appreciate people cooperating. so again turn off your headsets while the discussion is going on in english and i think we will lose the interface. i'm sorry about the technical

snafu. [speaking russian] [laughter] >> what animates the government now? are their goals or is this all sort of short-term political calculations to justify what's been done in the past year and a half, and to keep the political landscape so favorable? is there some big agenda? is there something beyond what's happening in ukraine that drives this? [speaking russian] >> translator: i believe in russia its widely popular at least among -- the post-imperial syndrome. great britain after world war ii, we were rich. we were rich people. we were strong, everybody was afraid of us. everybody respected us.

we collapsed. we became for. we became weaker. [inaudible] we want to be respected again. that's why the current government, the current government tries to extend this mood and try to take advantage, take advantage not to the extent that united states or ukraine or georgia, but it, too -- [inaudible] whatever we can grab and fight back. this has left the mood of part of the population which like me

used to live in soviet union but also the young generation who are looking for news about what a great nation, and a people of this country were all over the world and respected by the rest of the world. putin is the demeanor of the mood of the majority of russia. he very efficiently uses it for his domestic purposes. >> the level of self isolation, the level of antagonism just inside ukraine which seems to be lost now for a generation or more in terms of having any kind of close relationship with moscow. but since even among other neighboring countries that russia is dangerous, that it is prepared to take you to risks to violate all sorts of international norms and pursuit of the short-term political goals. how is that a smart strategy?

if anything come is in setting up a process of degradation of the stability that putin craves [speaking russian] >> translator: why should we give it up? you should be afraid of us. [inaudible] that's probably what you were here, maybe you can use this start to take into account our interest. there is no contradiction. it is a mood it is a goal to win back the respect, the respect that everything is correct. >> so let's turn a little to the domestic political environment. it was about four months ago exactly that the noted russian politician was killed just a

short distance from the walls of the kremlin, and there's no clarity at this point i think about why, about him, and about the long-term effects. can you give us your sense that you were close to him, about why this happened. [speaking russian] >> translator: on the level of my knowledge of the case different people who were close to the investigation, to the general. [inaudible] the people who perpetrated the crime. ..