Puerto Rico’s debt crisis: Made in the USA
Puerto Rico needs debt relief as it struggles to contain an unfolding economic and social crisis. But its creditors want to tighten the screws, explains.
THIS WEEK will be a crucial one in the battle over the debt crisis strangling Puerto Rico. The U.S. Supreme Court and Congress are both wading into the political and legal clash over a multibillion-dollar debt that is, in the words of the New York Times, "not payable."
On one side stand the institutions that loaned the island nation billions of dollars because Puerto Rico's bonds paid better returns than other municipal issues and were tax-exempt for U.S. investors. These creditors, a collection of Wall Street hedge-fund managers and vulture capitalists, want to use U.S. laws and courts to force Puerto Rico to repay every last penny of its debt burden, no matter the economic and social consequences.
They are counting on the U.S. government not to grant any form of debt relief for Puerto Rico, since the commonwealth, as it is officially designated, is legally barred from filing for bankruptcy like U.S. cities. That's why some hedge funds took on even more of Puerto Rico's debt recently, figuring that they could buy it for pennies on the dollar and use their political connections and various legal levers to make a windfall.
On the other side are the people of Puerto Rico, who for the last decade have endured a steady deterioration of their economy and living conditions.
The Puerto Rican economy has contracted by about 10 percent in the last 10 years. At 11.8 percent, unemployment in Puerto Rico is more than twice the jobless rate in the U.S. As a result, some 340,000 people left the island over the same decade in search of better economic prospects elsewhere.
THE STRATEGY of Puerto Rico's government so far has been austerity followed by more austerity in an attempt to balance its budget and close the deficit. This has meant sharp cuts in government services, layoffs of government workers and a more than 50 percent increase in the sales tax last year.
But like austerity measures imposed elsewhere around the world, the cure ends up being worse than the sickness, leading to further economic contractions, shrinking revenue and an even greater need to borrow to cover ballooning debt obligations.
Meanwhile, the island's 3.4 million residents face a crushing combination of economic meltdown and government dysfunction.
And if the social crisis weren't already bad enough, the Zika virus and its devastating life consequences for babies whose mothers are infected has already arrived in Puerto Rico. Within the next year, 25 percent of Puerto Rico's population is expected to contract the virus, and eventually 80 percent may be infected, according to an estimate by the Centers for Disease Control and Prevention.
The debt crisis is directly contributing to the Zika epidemic, as the New York Times explained:
The island, a warm, wet paradise veined with gritty poverty, is the ideal environment for the mosquitoes carrying the virus. The landscape is littered with abandoned houses and discarded tires that are perfect breeding grounds for the insects. Some homes and schools lack window screens and air-conditioning, exposing residents to almost constant bites. The economy is in shambles, and thousands of civic workers needed to fight mosquitoes have been laid off.
In an article in the Atlantic titled "Will Puerto Rico's Debt Crisis Spark a Humanitarian Disaster?" journalist Vann Newkirk reports:
Zika threatens to cripple Puerto Rico, and the debt crisis and its inability to pay for immediate interventions are direct factors in the looming epidemic. Hospitals are already overwhelmed...and they can barely cope with seasonal flu outbreaks, let alone a developing and little-known virus like Zika. Schools...are ideal breeding grounds for the mosquitoes that spread Zika, and children are especially vulnerable targets. In the realms of health care and education, economic woes are most directly transfigured into human misery.
IN EARLY May, Puerto Rico defaulted on $422 million in debt repayments. This sum is a tiny fraction of Puerto Rico's overall debt burden, but it signaled that the nation's political class was surrendering in the hopeless effort to keep up with debt payments.
Bond markets are now nervously waiting to see what political and legal framework that Congress, the Supreme Court and Puerto Rico's government will set up to resolve the outstanding debt burden. And on July 1, Puerto Rico will owe another $2 billion in debt repayments.
So how did Puerto Rico's debts grow so large, and what can be done about it now?
The U.S. Congress deserves the lion's share of the blame for passing a 1996 law that rescinded tax incentives which had helped to sustain a significant manufacturing sector on the island. The pharmaceutical industry in particular flourished in Puerto Rico, since "it was cheaper to make drugs on the island than anywhere else in America because companies didn't have to pay federal tax on the Puerto Rican operations," according to a report by CNN.
When the tax incentives phased out entirely in 2006, those industries and the related businesses that serviced them started leaving. Puerto Rico's economy has yet to recover.
But if the recent downward economic spiral was touched off by Congress rescinding corporate tax breaks, the U.S. government has for decades imposed terms on its last colonial possession that stunted Puerto Rico's economic vibrancy.
Take, for example, the Merchant Marine Act of 1920 (also known as the Jones Act), which mandated that all goods arriving in Puerto Rico by sea must be transported by a U.S.-flagged ship leaving from a U.S. port. As Nelson Denis, author of War Against All Puerto Ricans: Revolution and Terror in America's Colony, explains at his blog:
Every consumer item that passes between U.S. and Puerto Rican ports must be carried on a U.S. ship--this includes cars from Germany, engines from Japan, food from Central America, medicine from Canada--any product from anywhere. In order to comply with the Jones Act, all this merchandise must be off-loaded from the original carrier, reloaded onto a U.S. ship and then delivered to Puerto Rico. It all makes as much sense as digging a hole and filling it up again. Any foreign registry vessel that enters directly into Puerto Rico must pay extreme tariffs, quotas, fees and taxes which, again, are passed onto the Puerto Rican consumer. This is not a "business." It is a shakedown, a Mafia protection racket.
THE RESOLUTION of Puerto Rico's debt crisis will now depend on the outcome of negotiations, of internal struggles within the ruling elites in Puerto Rico and the U.S., and of popular struggles.
The hedge funds and other institutions that own Puerto Rico's bonds are spending small fortunes on lobbyists and other means to influence politicians, Democrat and Republican alike. Puerto Rico's political establishment is dominated by two parties: the Popular Democratic Party (PDP), which is linked with the Democratic Party in the U.S., and the New Progressive Party (NPP), which is connected to the Republicans.
Predictably, the Republicans oppose any leniency for Puerto Rico in bankruptcy reorganization that impose a "haircut" on creditors--that is, debt repayment at some fraction of the face value of the loans.
But the proposal backed by the Democrats and Obama--known as the Puerto Rico Oversight, Management and Economic Stability Act (or its acronym PROMESA, which is Spanish for "promise")--is hardly better. It would impose a financial control board that would be unaccountable to the people of Puerto Rico, but with practically unlimited powers to impose terms on government agencies, employment laws and social service providers.
Nelson Denis characterizes PROMESA this way:
The PROMESA Authority will be the governor, banker, judge, jury and pawnbroker of Puerto Rico. It will manage the entire Puerto Rican economy and be accountable to no one on the island. It will tell the Puerto Rican government when to jump and how high. It will issue debt, spend the money in any manner it sees fit and leave Puerto Ricans to pay the bill.
It will do nothing about the Jones Act, the loss of pensions, the privatization of public schools, or the hedge funds that will own the physical infrastructure of Puerto Rico--its schools, prisons, highways, electrical grid and water supply.
Despite all of this, Governor Alejandro Garcia Padilla [of the PDP, aligned with the Democratic Party] recently stated that "he would accept a federal fiscal oversight body, as long as it respects Puerto Rico's autonomy."
It would thus appear that the governor is a clown.
This is where our "Commonwealth" relationship to the U.S. has gotten us: an island clerked by clown puppets. A dictatorship in the Caribbean, owned and operated from Wall Street, disguised as a "management assistance authority."
The big financial players that bought Puerto Rico's bonds did so because they paid some of the best returns of any municipal bonds, all the more so because they were considered risky. Now that the risk has metastasized into a crisis, however, the bondholders don't want to pay for a penny of it.
Even by the system's own rules, they knew that greater returns carried greater risk and purchased the bonds anyway. They should accept the write-down on the loans they made. But as the bailouts for big banks and not homeowners after the Great Recession of 2008-09 demonstrated, those with the clout elbow their way to the front of the line when it comes time to settle up.
This means that unless the people of Puerto Rico fight back, their fate will be the same as the people of Greece. They will be forced to accept ever-harsher austerity measures that only make the underlying crisis worse. As Puerto Rican socialist Daniel Orsini put it last summer in an article for SocialistWorker.org:
If the people of Puerto Rico, including those who have recently fled in search of a better life, don't want the island's destiny placed in the hands of vulture-fund managers, transnational corporations, the U.S. and its colonial puppet government, we must fight--as the Greek people have been for some years now.
The Puerto Rican left has been evolving and transforming itself in recent years, but it still has yet to congeal into any semblance of a coherent social force...
The Puerto Rican nation is made up of roughly 8 million Puerto Ricans; only 3 million currently live on the island, while a majority of the rest lives in the U.S. Any serious political contribution to challenging U.S. imperialism and neoliberalism and to fighting for independence and socialism on the island must base itself not only on Puerto Ricans living in the colony, but also those living in the belly of the beast.