The Puerto Rico debt crisis — Like Greece with a difference
by Gaius Publius
Because of the coverage of Greece and its debt problems, I’ve been fielding a lot of questions about Puerto Rico and its debt problems as well. Puerto Rico’s problems aren’t the same as the Greeks’ though; similar, but not matching. For one thing, Puerto Rico is a territory of the U.S. and subject to some unique-to-itself U.S. laws. Greece is under the thumb of northern Europeans.
Nevertheless, like Greece, Puerto Rico doesn’t have its own currency and doesn’t have “permission” to declare bankruptcy. There’s a nice explainer at Vox — “Puerto Rico’s debt crisis, explained in 11 basic facts” — that’s worth looking at. I’ll provide the “11 basic facts” below with some explanation, and suggest that you click through to see any explanation you’d like to know more about.
Dara Lind, writing at Vox, begins with this:
Puerto Rico’s debt crisis, explained in 11 basic facts
On June 28, the governor of Puerto Rico, Alejandro Garcia Padilla,
announced that the island was not going to be able to pay the $72
billion it owes. The announcement is the culmination of several years of
economic woes, but the island’s debt has now become an urgent problem
for the US territory — and therefore, for the US.The problem is especially tricky because US bankruptcy laws don’t
allow government institutions in Puerto Rico to declare bankruptcy, as
those in US states can. US policy did a lot to create the problem, and
people on both sides of the debate — Puerto Ricans and the creditors who
own their bonds — are Americans.The worst news: The island’s fate is in the hands of Congress.
Now the first of the “11 basic facts”:
1) Puerto Rico is sinking under $72 billion in debtPuerto Rico has been dealing with a worsening debt crisis for several
years. It’s been suffering economically since 2006, but thanks to a
federal tax loophole it’s continued to be able to borrow money without
people paying a whole lot of attention to its creditworthiness. As a
result, both the main Puerto Rican government and its “public
corporations” (like utilities) have racked up immense amounts of debt
through bonds and tanked their credit ratings — even while trying to cut
services and raise taxes. Now the Puerto Rican government is
acknowledging that it’s not going to be able to keep borrowing money
just to pay off old debts.So the question is whether Puerto Rico — either itself or its public
corporations — will be able to declare bankruptcy and start working with
a judge to restructure its debts. Congress is considering allowing some
bankruptcy in Puerto Rico. But it’s divided because many of the holders
of Puerto Rican debt are American citizens and American investment
funds.
2) Puerto Rico’s economy has been struggling since 2006, when the federal government stopped offering business incentivesIn the middle of the 20th century, the federal government wanted to
encourage manufacturers that were tempted to move or expand to
developing countries to move to Puerto Rico instead. But since Puerto
Rico has the same labor standards as the US, that wasn’t exactly
appealing to businesses — especially when Congress decided in 1974 to
bring Puerto Rico’s minimum wage up to the rest of the US’s, as well.
So instead, the government granted big tax breaks to businesses that
had operations in Puerto Rico; starting in 1976, basically any profit a
company could trace to Puerto Rico wouldn’t be taxed. The tax breaks
gave Puerto Rico a pharmaceutical industry.This cost the US a lot of money in lost tax revenues, and in 1996
Congress decided to phase out the tax break. It officially ended in
2006, throwing Puerto Rico into a recession. (Many of the companies that
benefited from the tax break moved to the Cayman Islands.)That was swiftly followed by the Great Recession of the late 2000s,
which basically kicked Puerto Rico while it was down. It’s been
struggling ever since. In 2013, 45.4 percent of Puerto Ricans were
living in poverty.
3) People kept buying Puerto Rican bonds because of a quirk in the tax codeNone of this sounds like a government you would want to invest in.
And indeed, Puerto Rico’s bond rating has been downgraded to junk level.
But people continued buying Puerto Rican bonds even after it stopped
being a good idea to do so.The reason for this is, again, a federal tax break. Puerto Rican
bonds are “triple-tax-exempt” — American companies and individuals who
buy them don’t have to pay federal, state, or local taxes on them.
Typically, a municipal bond is only triple-tax-exempt if you buy it from
the city where you live. But Puerto Rican’s bonds are triple-tax-exempt
for everyone. That made Puerto Rican bonds a particularly appealing
investment opportunity — so appealing that people might not have looked
too closely at the island’s fiscal situation.Right now, hedge funds hold about $15 billion in Puerto Rican debt, mutual bond funds hold another $11 billion or so, and individuals hold the rest.
So the Puerto Rican debt crisis isn’t just relevant to Americans
because Puerto Rico is part of America — it’s relevant because Americans
are the ones owed the money.
And the rest:
4) Hundreds of thousands of Puerto Ricans moved to the mainland, worsening the economic crunch
5) Puerto Rico is caught in a “death spiral” of emigration, tax hikes, and benefits cuts
6) An obscure federal law from 1920 makes everything more expensive
7) It’s not just the central government that owes money — it’s also utilities and other public corporations
8) Puerto Rico can’t declare bankruptcy. Neither can its cities or utilities.US states can’t declare bankruptcy. But “substate entities” within a
state — like cities, judicial districts, or public corporations — can.Puerto Rico also can’t declare bankruptcy, but under US law neither
can its “substate entities.” If PREPA and other Puerto Rican public
corporations were located in New York or California, they’d be able to
declare bankruptcy — but because they’re in Puerto Rico they can’t. …
9) Democrats are pushing to allow limited bankruptcy; Republicans say it isn’t enough
10) Creditors argue that changing the bankruptcy laws is unfair
11) But if nothing changes, Puerto Rico is looking at a slow, rolling fiscal disasterIf Congress doesn’t make any changes to bankruptcy laws, Puerto Rico
is going to start falling behind on its minimum debt payments in
mid-July. That opens up the possibility that individual creditors will
start suing Puerto Rico to get their money back — and asking a judge to
make the territory start paying any revenue it gets to its creditors,
rather than paying its public employees or paying any benefits to its
residents. …
Two takeaways from me — One, we’re living in a world where, according to those who run it, every creditor must be made whole, period, independent of the fact that risky bets (investments) come with risk premiums, which is by definition their compensation in case of default.
Because the investor class runs the (non-military, non–state security) aspect of the world, they can enforce a regime in which none of their friends can lose money, no matter how risky the bet (investment). Yet if Trump can declare bankruptcy (three times, or so I hear), the same should be allowed to Greece and Puerto Rico. In that sense, Puerto Rico very much resembles Greece.
The second is the “brown south” problem. In both cases, Puerto Rico and Greece, the debt is owed by “those people” to people who look rather white — most Americans, most Germans, most of the French and the Dutch.
I endured an interesting rant at dinner the other day. A perfectly nice (white) Frenchman started in on Greece and two phrases fell almost immediately from his lips: “I’m sick of having to continue to pay…” and “lazy.” Mind you, not all French people think as my friend does. Thomas Piketty, who is French, is definitely not in that camp. Nor are all Germans and other northern Europeans.
But enough in the north are following the lead of German Finance Minister Wolfgang Schäuble, who seems to have taken the German reigns from Angela Merkel vis-à-vis Greece, that it sure looks like, down the road, the European project is in real trouble.
As is Puerto Rico. And as I said at the beginning, the fate of Puerto Rico is in the hands of Congress. Stay tuned.
(The following, from the movie version of West Side Story, featuring Oscar winners Rita Morena and George Chakiris, is a good example of the duality of Puerto Rico and its “brown south” problem as seen by white Americans. Note especially the dialog that introduces the song:
Did you catch the love of consumer culture at about 1:30? “I’m going back in a Cadillac. Air-condidtioned. Built-in bar. Telephone. And television. Compatible color.” And later, “In Puerto Rico we had nothing.” Reply: “We still have nothing, only more expensive.”
West Side Story, libretto and book by Stephen Sondheim, who writes really well. Check out the film The Last of Sheila sometime.
GP
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