By Anthony Rubinich
On July 4th 1776, the American colonies declared independence from Great Britain. In 2016, the island territory of Puerto Rico is fighting for a different kind of independence. As the Revolutionary War was fought with bayonets and muskets, Puerto Rico’s fight for financial independence is being fought with words and money. Unfortunately, this a fight that our island neighbor is losing.
On June 30th, the Senate passed a bill to help the Puerto Rico government manage its insurmountable amount of debt. The Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, passed through the Senate by a vote of 68 to 30. Though President Obama signed PROMESA with no hesitation, the island’s long, arduous rehabilitation process has only just begun. It will take decades of effective governance to get Puerto Rico back on track.
So how did it happen? How did Puerto Rico dig itself a $70 billion hole it can’t get out of? It didn’t just happen overnight.
The PR has been a territory of the United States since 1952. As a territory, Puerto Rico receives assistance, but it doesn’t have the sovereignty of a state. While it has had the benefits of being a US territory, the PR has not had a legitimate economy since the early 1970’s.
Corporate tax breaks designed to spur the economy expired in 2006. As a result, manufacturing and other businesses left the island. Since 2006, the government borrowed money by issuing municipal bonds to compensate for decreasing revenue and prevent mass layoffs. The collapse of the housing market in 2007 also hurt the Commonwealth’s economy. As more and more businesses left the island, the PR responded by borrowing more and more money, not just from the U.S. government, but from U.S. investors. Mutual funds have looked to bonds issued by the PR government to find high yielding offerings during a period of discounted interest rates.
The struggling economy led many people to leave the island. Between 2010 and 2013, roughly 144,400 residents emigrated in search of better paying jobs. “A mass exodus of workers, retirees and entire families has shrunk the PR’s population by more than 9%,” says Wall Street Journal reporter, Nick Tamiraos.
The government has closed nearly 10% of schools for defaulting on their payments. With nurses and doctors leaving the PR, hospitals are closing their doors as well. “The strains on public health infrastructure have made it more difficult for the island to combat an outbreak of the Zika virus,” says Daniel Marans, reporter for the Huffington Post. Hospitals that could not pay their electric bills got their power turned off. There are even stories of hospital staffs rushing to finish surgeries on time before power lines were cut.
With a colossal debt, shrinking workforce, and inefficient cash –flow, it was only a matter of time before the island would become insolvent. In a press conference almost a year ago, Governor Garcia Padilla admitted, “The debt is not payable.”
“For me it is difficult to understand that people are questioning how severe the financial crisis is,” says José Javier Colon, University of Puerto Rico
On July 1st, the PR government defaulted on two huge bond payments. The first time since 1933 that a state or territory has failed to pay its general obligation bonds on time. Currently, Puerto Rico’s debt stands at $73 billion. That’s more debt than Detroit incurred when the city declared bankruptcy in 2013. A large portion of the PR’s debt has been absorbed by vulture funds. These “vultures” are hedge funds who buy debt from companies, countries, and individuals who have become insolvent. These hedge funds have made a killing off Puerto Rico’s fall from grace. A similar episode occurred in 2001 with debt issued by Argentina
So why doesn’t the island just declare bankruptcy like Detroit?
Loopholes and caveats in the legal system have effectively blackballed the PR. As a commonwealth of the United States, Puerto Rico cannot declare bankruptcy or restructure its debt without congressional approval. Furthermore, the same hedge funds that are profiting from the commonwealth’s demise have lobbied against sending relief and granting bankruptcy powers to the island.
How will Puerto Rico’s debt crisis effect the rest of the United States?
General consensus is that the PR is of no immediate economic danger to the rest of the US. The biggest threat the debt crisis poses is the vulnerability of individual investors, mutual funds, and other financial institutions who have invested in the territory’s municipal bonds.
In the face of economic disasters or political events around the world, there is a tendency for people to want to care about America first and no one else. Everyone is entitled to their opinion, but Puerto Rico is not some distant land or a mere tourist attraction, it is an island with its own people and culture right in our own backyard.