Puerto Rico: An Economic Crisis

Cillian Lyne details the specifics of the Puerto Rican Financial Crisis.

A glance at any reputable Business based news source will reveal economic turmoil in Puerto Rico. For the casual reader this would elicit a calm “hmm” and a google search to determine where exactly Puerto Rico is before returning to reading the rest of the news. Puerto Rico is a trade hub between North and South America and if it goes bankrupt, it does not bode well for the health of the international economy, and we are just after the worst cold since the 1920’s.

Puerto Rico is a small Archipelago just east of Cuba. Given to the U.S by Spain after the Spanish American War in the early 1800’s, it exists currently in a sort of legal purgatory. It is what’s known as an unincorporated U.S territory – This means that its citizens are U.S citizens (Although that is disputed by hard-line republicans in both the U.S and Puerto Rico), it pays taxes to the U.S and uses the U.S Dollar, however it is not a state. Which means it doesn’t have a representative in congress, and doesn’t get the funding from a federal level that states do.

“To put it simply, it operates on a deficit, a rather large one”

The Financial Problems:
See, the Puerto Rican government, like so many of its neighbours, is extremely inefficient.
So much so that one report from 2014 said that Puerto Rico was unable to collect 44% of its taxes on a yearly basis, yet it still overspends. Mostly on public services like Medicaid and transportation, but also on gratuitous salaries for the upper members of the government- owned businesses it runs.To put it simply, it operates on a deficit, a rather large one. This isn’t unusual as many countries do too. But Puerto Rico had not raised taxes or cut funding.
Let’s say for a moment that you are the Governor of Puerto Rico and you need money because you realise you can’t afford to operate schools AND pay the territories taxes this year. It’s just a few simple steps and you’re back in the black.

  1. Create interest-free really attractive bonds your territory has the right to issue because of a war-based legislation enacted in 1917.
  2. Sell these bonds to municipal investors, who don’t get taxed on these investments because of the previously mentioned act.
  3. Skimp on increasing the base public salary pay from $26,000 for an experienced employee to something actually livable and buy yourself a new “Government-use” vehicle to sit in your garage. Go on, you deserve it.
  4. Pay everyone what they are owed across federal and public services, and dedicate some of your budget for next year to paying back the investors from step 2…eventually.

This is pretty much how it worked. They even began to issue bonds to pay back previous investors in bonds. It wasn’t until they owed $71 Billion (About 68% of the country’s GDP) that the international financial institutions realised what was going on. They began to downgrade the bond status of Puerto Rico, eventually down to Junk status. A giant “Abandon hope all ye who enter” to all potential investors in Puerto Rican bonds.
This was bad. What was even worse is that some bonds were bought with so called Acceleration Clauses – If your bonds go in the toilet, we want our money back. Now.
So, if the $71 Billion was spread out over a 50 year period, we wouldn’t be looking at this with such dire eyes. Ireland for example owes just over 2.5 times what Puerto Rico does. However, we were given it on a low interest, long term loan from the E.C.B or the European Central Bank. A bank which by all accounts doesn’t want us to fail. If we did miss a repayment (we haven’t so far), the only repercussion would be a stern talking to in Angela Merkel’s office and a slap on the wrist. Instead, for the little Americana island, the Wolves are at the door.  Already enacted austerity measures have caused protests and the sitting political powers can do little but watch as the country is unable to pay its public services.

“Puerto Rico has been pulled from the brink of destruction, but is instead just a meager shove away from total economic destitution”

United States Involvement:
Afraid that it’s glorified military base would tank, which would cripple many investment corporations in the country, (Some estimates claimed that 77% of  U.S financial institutions would take a hit) the US sat down and thought really, really hard about how it would give Puerto Rico the protections a State has from debt collection, without giving it statehood. See, if a state like Texas can’t pay back its debt, it can simply default on or defer the loan to a later time without fear of prosecution. Sound’s good, to give them that, without the statehood, The Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA was established.

This act allows Puerto Rico to suspend or default on loans without fear of lawsuits. It also creates a board which advises on the creation of a sustainable budget and allows Puerto Rico to go into a reduced form of Bankruptcy if the need arises. This all sounds great, but as mentioned earlier, the wolves are at the door. PROMESA is a promising solution, but due to bureaucracy it is taking considerable time to implement. Puerto Rico has already suspended repayments, but the board to oversee its budget hasn’t officially met up yet and the reduced form of bankruptcy isn’t clearly defined enough for it to be a quick fix should the need arise. Puerto Rico still needs to pay back $71 Billion in a much shorter time-frame than it had anticipated, and even with the U.S’s help that is no easy task.