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A member of a labor union shouts slogans while holding a Puerto Rico flag during a protest in San Juan September 11, 2015.
A member of a labor union shouts slogans while holding a Puerto Rico flag during a protest in San Juan. Photograph: Alvin Baez/Reuters
A member of a labor union shouts slogans while holding a Puerto Rico flag during a protest in San Juan. Photograph: Alvin Baez/Reuters

Puerto Rico poised to miss another debt deadline as financial crisis rages on

This article is more than 8 years old

The island some have called ‘America’s Greece’ looks poised to default on its $72bn debt for a second time amid anger over territory’s ‘Wall Street captors’

Debt-racked Puerto Rico looks all but certain to miss a second repayment deadline on Tuesday – a move that is likely to worsen the financial crisis in the US territory and turn up the political heat on a Caribbean island that has been dubbed “America’s Greece”.

Puerto Rico’s government development bank is due to make a $354m payment to bondholders on 1 December but is unlikely to be able to pay. Puerto Rico governor Alejandro Garcia Padilla was still negotiating with creditors late Monday.

After defaulting on its $72bn debt for the first time ever in August (the bank missed a $54m payment), barring an all-but-inconceivable reversal of fortunes, the country will also miss a $900m January deadline.

The issue is already a hot button among presidental candidates. Democratic frontrunner Hillary Clinton chastised Congress for inaction, saying bankruptcy – which would require congressional intervention – is the only option. “There is no alternative because the debt is so large and it is impossible to restructure it without the kind of help you get in bankruptcy,” she said in a roundtable event.

Republican candidate Marco Rubio said he believed the commonwealth needed to tighten its belt as it teetered on the edge of financial ruin. “I believe what would solve Puerto Rico’s problems is the same thing that would solve Washington’s problems, and that is to restructure the way government spends its money.”

While many cite years of mismanagement for the escalating crisis, others say the Caribbean island’s unmanageable debt stems from the way the US government, with input from Wall Street, has managed the territory and prevented any of its citizens from having a say in the way their resources are used. The island is prevented by law (via the Jones Act of 1917) from developing its own international shipping trade, for example.

Once seen as hot investments, Puerto Rico’s bonds were downgraded to junk earlier this year. The securities are so unlikely to pay back even their full principal that investors launched a class-action suit against the corporations, notably Swiss bank UBS, that sold them. In September, UBS paid $33.5m to settle the case.

“UBS profited handsomely from churning out questionable general obligation bonds by Puerto Rican municipal agencies over a period of years, and then profited again by aggressively marketing those securities to individual investors through its closed-end funds, after seeing zero appetite among institutions who knew how risky the island’s debt had become,” said Jay Eisenhofer, counsel for some of the plaintiffs in the lawsuit. “UBS needs to be held accountable to the long-term economic damage it caused – to the island and to investors.”

Though the comparison to Greece has been made regularly, it isn’t completely accurate – Greece is much wealthier than Puerto Rico.

Many mainland Americans have expressed concern about exposure to the now-radioactive debt, but in fact, because local financial regulators allowed Puerto Rican credit unions to invest in much riskier bonds than they would have permitted otherwise, so long as those bonds were issued by Puerto Rico, fully 20% of the mammoth debt rebounds directly on to the shoulders of Puerto Rican pensioners and penny-savers.

Those are the same people whose average income per capita hovers above $23,000 a year (the figure in Mississippi, the poorest of the 50 states, is just below $36,000), but who pay more than twice what the rest of the country pays for electricity: Americans pay 12 cents per kilowatt-hour on average, compared to 26 cents in Puerto Rico. They are also the people who are likely to see those pensions slashed in coming months as Puerto Rico’s largest employer – the government – tries to tighten its belt.

‘In league with their Wall Street captors’

Many also blame governor Alejandro García Padilla for allowing private industry to take over big chunks of the country’s infrastructure at a time when it desperately needs income. Nelson Denis, a former New York state assemblyman, laid the blame for the eroding public infrastructure at the feet of Padilla’s administration: “These motherfuckers are in league with their Wall Street captors and there’s no other way to put it,” said Denis by phone in Puerto Rico. “It’s sickening.”

Hedge funds have suggested laying off teachers and closing schools to repay the debt. The IMF has said Puerto Rico should lower the minimum wage and raise taxes.

“It’s not that Puerto Ricans are lazy people that don’t want to pay their debts. It’s extremely rich corporations that are socking it to both the very poor in Puerto Rico and to middle-class Americans,” said Denis.

Denis said the commonwealth is quietly giving the store away to private industry as it puts out requests for proposal for schools – to be built for what Puerto Rico’s public-private partnerships authority admits is “a very limited amount of money available at each school – an average of between $3m-$5m per school”.

“The government is attempting to spread the modernization funds across a vast number of schools, and therefore is severely constrained with regards to how much money can be spent at any particular school,” according to a “master plan” for school improvement published by the authority. “This may result in the proposed list of improvements having to be modified on a school-by-school basis so as to live within the established budgets and extend the reach of this program to all 78 municipalities in Puerto Rico.”

The commonwealth of Puerto Rico is not quite a state and not quite a country; it’s the Estado Libre Asociado de Puerto Rico, or Associated Free State.

That, too, turns out to be tricky, according to Denis. “It’s not free, it’s not associated and it’s not a state,” he said. While it is ruled by the US, it has no voting representatives in either the House of Representatives or the Senate.

“Puerto Rico is not a state. It’s not allowed to have any of the privileges and immunities of a state,” Denis said. “And if you’re not going to make Puerto Rico a state, give it its Chapter 9 bankruptcy release.”

Chapter 9 bankruptcy was the last-ditch option that Detroit chose when its debts overwhelmed the city. Detroit’s 2013 municipal bankruptcy, the largest in US history, has allowed the city to re-engineer its finances. But the option is not legally open to Puerto Rico.

A bill to reform Puerto Rico’s bankruptcy options introduced into the House in February by Puerto Rican representative Pedro Pierluisi – who has no voting power – failed to make it out of committee.

‘That’s the fun part: Nobody knows’

Julio Lopez of Make a Road, a nonprofit community organizing group that focuses on Latino people, said that Puerto Rico’s refusal to pay may be tactical. “If you are threatening people to [get them to] negotiate with you, ending up in courts is a good way to make people negotiate with you,” said Lopez.

So what happens next? “That’s the fun part: Nobody knows what’s going to happen,” Lopez said. “The biggest issue is that Puerto Rico doesn’t really have a system where it can restructure its debts.”

Lopez, Make a Road, and another nonprofit called Hedge Clippers have a modest proposal for the US government: do what it did last time banks sold billions of dollars in toxic bonds.

“The Federal Reserve might have the authority to provide relief for Puerto Rico without going to Congress; it’s the same thing they did in 2008 to save the banks,” said Lopez. “It would help restructure its debt by forcing the creditors to sit down. It’s an interesting idea because it doesn’t require congressional approval. It would be more feasible, because we’d just be talking to Democrats.”

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