Puerto Rico Debt Crisis: America’s Greece?

Strapped for revenue, a desperate government declares it cannot pay its debts and needs creditors to negotiate less stringent terms. Meanwhile, it slashes its workforce to rein in costs.

This may sound like Greece and its ongoing ordeal, but it also describes an American problem: Puerto Rico, whose governor in June declared that the island could not repay its $72 billion debt. Last month, the island’s Public Finance Corporation defaulted on most of its debt, setting up what could be one of the biggest US municipal debt restructurings in history.

The island has slashed government workers to 230,000—a drop of about 70,000—in the last six years and recently saw unemployment hit 12.4 percent, more than double that of the United States. The island has also been hit by a housing bust, a drought, and what’s being called an “outmigration,” where tens of thousands of middle-class workers are leaving for the mainland United States in search of jobs. While vowing more sacrifices, Governor Alejandro Garcia Padilla is also seeking some debt forgiveness and more payback time. The government of Puerto Rico announced over the weekend that it was postponing by a week a plan for a “negotiated moratorium on the debt, with a new deadline of September 8. The Obama administration, for its part, has said it has no plans to bail out Puerto Rico.

How did the Caribbean island, famed for great beaches, but also beset with poverty, get in this jam? BU Today asked Julian Go, a College of Arts & Sciences professor of sociology and an expert on colonialism, including American. (The United States acquired Puerto Rico in the 1898 Spanish American War.)

BU Today: How did Puerto Rico rack up such enormous debt in the first place? And to whom is most of it owed?

Go: US investors, especially hedge funds, have been investing in Puerto Rico because of tax breaks that Puerto Rico enjoys due to its special status, but which states like Massachusetts do not enjoy. Perhaps more important, investors have been interested in Puerto Rico because municipalities and public corporations cannot declare bankruptcy in Puerto Rico. Detroit, for instance, can and did declare bankruptcy, as can public corporations in Michigan or Massachusetts. In Puerto Rico, due to an exemption passed by the US Congress (but without Puerto Rican representation in that Congress), cities and public corporations cannot do so. The Puerto Rican courts tried to remedy that law, but US federal courts struck it down.

The debt crisis is partially conditioned by Puerto Rico’s anomalous political status: within the United States, but also outside it. In 1898, Puerto Rico became a colony of the United States. Today, Puerto Rico is a commonwealth, which means that it has more autonomy, but it is still subject to certain controls by the US federal government and Congress without congressional representation. If you are a resident of Puerto Rico, the president can send you to war, but you cannot vote in presidential elections, and Congress can determine some laws for you, but you cannot elect a voting member of Congress.

Is austerity the solution? Debt forgiveness? Both or neither of these?

One measure being discussed is to allow Puerto Rican substate entities to declare bankruptcy. This is what some in the Puerto Rican government reportedly have been asking Congress to allow. Whether or not this would solve everything is unclear; most likely, it wouldn’t. But it might help. The problem is that Congress has very little incentive to do so, given Puerto Rico’s unique—and some might argue, inferior and dependent—political status within the United States. 

Another route towards a longer-term solution to the economic problem is for Puerto Rico’s quasi-colonial status to be changed. Puerto Rico’s nonvoting congressional delegate, Pedro R. Pierluisi, has argued that statehood is exactly the way out, and that argument merits serious attention.

How has Puerto Rico’s government performed in this crisis?

Puerto Rico’s status has not only contributed to the crisis, it also makes it much harder and more complex for Puerto Rico to dig itself out of the crisis. The fact that substate entities in Puerto Rico cannot declare bankruptcy limits their ability to manage the crisis and restructure debt. This is a huge problem: close to a third of Puerto Rico’s debt is held by cities and public corporations like the Puerto Rico Electric Power Authority.

Puerto Rico’s status also means that the autonomy of Puerto Rico to solve the problem is severely limited: any solution will have to involve Congress, which could, for instance, pass legislation to allow Puerto Rican substate entities to declare bankruptcy like in other states. But Puerto Rico has no representation in Congress, nor does it have representation in the executive branch (since Puerto Rican residents cannot vote for the president). US financiers, who have money to lobby Congress, probably have an interest in preventing Puerto Rican substate entities from declaring bankruptcy, in some cases at least. Something of this influence of US financiers has already been seen. For example, Bloomberg Business reports that when the Puerto Rican government recently passed legislation to allow local corporations to restructure their debt, “bond funds affiliated with Franklin Resources Inc., Oppenheimer Rochester Funds, and Blue Mountain Capital Management LLC sued, contending the law was unconstitutional.”

Has the federal government been helpful?

Certainly the federal government affects the health of Puerto Rico’s economy: goods are incredibly expensive in Puerto Rico, and part of the reason why is that, due to the Jones Act in the early 20th century (which was one of the key laws passed by Congress for Puerto Rico’s status), goods coming into Puerto Rico from overseas (unlike goods coming into Massachusetts or other states of the Union) have to pass through a US port on the mainland first, and then be shipped to Puerto Rico.

Readers doubtless will be reminded of the Greek debt crisis. Are the two cases different?

Puerto Rico’s quasi-colonial status makes it different from Greece and its debt situation, because Puerto Rico is not a fully sovereign nation, and that status, as Pierluisi points out, has contributed in various ways to the making of the crisis. Not only has it made Puerto Rico a site of almost unbridled speculation for investors, it has prevented Puerto Rico from receiving various federal benefits and social protections (such as the Affordable Health Care Act, the child tax credit, and the earned-income tax credit) and thereby partially driving the Puerto Rican government’s need to borrow heavily.

By Rich Barlow

Julian Go says colonialism has fueled commonwealth’s troubles

Puerto Rico Debt Crisis: America’s Greece?