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Crisis in Puerto Rico


Puerto Rico typically only makes news in the US when the topic of statehood comes up. But the island territory has been embroiled in an economic crisis for the past several years, which is now coming to a head.

First, it’s helpful to be aware of Puerto Rico’s status relative to individual states in the US. It’s more than a difference in name and voting rights. Puerto Rico doesn’t have any representation in Congress, nor do its people get any electoral votes for President. In other words, Puerto Ricans have no power to democratically influence the US federal government. This drives home Puerto Rico’s status as a territory or, to describe it more aptly, a colony.

Right now, Puerto Rico is drowning in debt to the tune of $70 billion. This is not a problem that emerged overnight, but developed over a period of years, and originated at least in part because of Puerto Rico’s limited powers to self-govern. Unlike a city such as Detroit, for instance, Puerto Rico cannot declare bankruptcy. It functions more like a state in that it must make cuts to balance its budget and pay down debts. Defaulting is simply not an option, because it would have far-reaching consequences for the US economy in general.

But Puerto Rico already has defaulted. Payments on debt have been missed. And this is the culmination of a fiscal deficit that began around 10 years ago, when expiring tax cuts negatively impacted the business climate on the island. Corporations which were happy to invest when taxes were low decided to flee back to the mainland US once the tax cuts expired. This slowed down Puerto Rico’s economy, and then the financial crisis of 2008-9 hit and sent the country deeper into debt. Hundreds of thousands of Puerto Ricans left for the mainland–something they are entitled to do, as US citizens–which shrank the tax base even further. The government of Puerto Rico borrowed money by issuing municipal bonds, and these were used to keep paying for government services and infrastructure. No doubt it was hoped that the shortfall would eventually disappear when the economy recovered, but this didn’t happen. The island has become only more and more indebted.

Currently, negotiations are ongoing to determine whose debts get paid first. There are some debts, so-called “good faith and credit” bonds, which Puerto Rico cannot default on or avoid paying–they must be paid back at 100%. Others can be negotiated down to some fraction of the original value. Either way, it’s going to take time and money for Puerto Rico to emerge from this crisis. In the meantime, it appears likely that the island will have to cut major expenses like education and healthcare, along with infrastructure building and maintenance. These do not bode well for creating a brighter future. Austerity hasn’t worked in Greece and it’s not going to work here, either.

Many Americans on the mainland have only begun to care about this issue because various investment vehicles–think personal 401(k)s and mutual funds–hold Puerto Rican debt. Should those debts take a haircut or be wiped out completely, there goes your investment, too. My personal view is that this shouldn’t deter Congress from wiping clean as many debts as possible, though. The rest of the US economy can absorb the hit; the tiny, impoverished island of Puerto Rico cannot.

The obvious question, then, is what Congress is doing about it. That would be the debt relief bill which House Speaker Paul Ryan has been working on for months, and which President Obama signed yesterday. What does the bill do?

The legislation establishes a financial oversight board that can approve court-supervised restructuring of more than a dozen classes of debt issued by the territory and various agencies. [Puerto Rico’s Gov.]( Alejandro García Padílla said the island will default on some of the $2 billion in debt payments due Friday, including bonds with the most senior payment priority. The law doesn’t prevent a default but rather provides relief against creditors’ litigation. Without the bill in place before Friday, the island’s debt crisis would have grown “much worse, and might have been unsolvable,” said Treasury Secretary Jacob Lew.

Thwarting litigation means the island (and, by extension, the US government) cannot be sued for failing to make payments. This gives Puerto Rico some breathing room to work out a long-term solution. Part of why it took so long to put together such a seemingly obvious measure is because many members of Congress didn’t even know why it was their issue to solve:

The Puerto Rico debate presented challenges because many lawmakers didn’t understand why they were being asked to address the island’s debt crisis. (Because Puerto Rico is a territory, its municipalities aren’t eligible to file for bankruptcy as those in states can.) But the unfamiliarity made it easier to form bipartisan coalitions because the issue lacked some of the reflexive partisanship of more ideological debates.

In this case, at least, such ignorance proved to be a boon!

One consistent feature of the attempts at debt relief for Puerto Rico has been avoiding taxpayer risk. Taxpayer money from mainland coffers cannot be used to help pay down Puerto Rico’s debt–it must come from Puerto Rico’s tax base or nowhere. This, of course, is an instance where Puerto Rico’s status as a dependent territory does it no favors. A US state would never be allowed to face such hardships on its own–indeed, the stimulus passed in 2009 consisted of many direct transfers of federal dollars to states and cities in an effort to shore them up against economic catastrophe. Targeted bailouts of specific states and cities are historically unusual in the US but certainly fall well within federal authority. For Puerto Rico, however, Congress is only willing to help shield the territory from its most immediate threats.

We won’t know for some time whether the provisions just passed are robust enough to truly help pull Puerto Rico back from the brink. My suspicion is that this will only amount to temporary relief, and the island will be saddled with unpayable debts for years or even decades to come. Only time will tell. But if our colony’s economic freefall continues, we will have only ourselves to blame, for not stepping in sooner and for not doing enough when Puerto Rico needed us.

Photo by James Willamor