Puerto Rico, the other Greece that scares the US

Young people emigrate because they cannot find jobs. The government has no say on monetary policy. It does, however, on fiscal policy, and in the last 10 years its spending was much higher than its income. Debt kept accumulating, and equals now 100% of GDP. According to its critics, the social, school and health systems, as well as retirement conditions for some groups, like judges and teachers, are unsustainable.

San Juan, Puerto Rico - A man waves a national flag as others stand nearby during a protest in San Juan May 13, 2015. University students and employees took to the streets to protest against government plans to implement cuts to public university budgets, according to local media. REUTERS/Alvin Baez

Greece? No, but a land that has in common with Greece beautiful coasts and beaches, and a too big to serve of a debt burden. That is Puerto Rico, an unincorporated state of the United States. On June 26, Gov. Alejandro Garcia Padilla said that the $ 72 billion dollar debt was "not payable", adding "This is not politics, this is math.” With more than $ 1.2 billion due on July 1, the news sent a shiver down the spine of Wall Street. With a wording that recalled Greece's negotiations, the governor went on explaining in his interview with the New York Times, that should its creditors — mostly US banks and financial institutions — not be willing to negotiate a debt restructuring (read "debt reduction"), Puerto Rico's "economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”

Puerto Rico has a population of 3.5 million. So why does its financial drama scare investors in the US? "It's systemic risk, stupid", one could paraphrase Bill Clinton's strategist. In the 70s, the government and other Puerto Rico-related institutions began to issue bonds with very attractive yields. Pension funds, bonds and hedge funds all have Puerto Rico municipal and other bonds in their portfolios. Many American savers might not even know that they have them in their pension fund or retirement portfolios. Large bond funds and hedge funds could sell them, but with losses close to 50%.

One of the laws of money prevailed in the few frantic hours before midnight of 30 June: better something today than nothing tomorrow. Lenders agreed to buy fresh short-term bonds that allowed Puerto Rico Treasury to pay the over $ 1.2 billion due on the next day. The sigh of relief in Wall Street did not conceal, however, that Puerto Rico was once more kicking the can down the road.

Anticipating the deadline, and an increasingly likely default, the government asked a few months ago a group of former IMF and World Bank experts to suggest solutions. Their recipe recalls Troika's measures for Greece: cutting tax benefits to foreign companies, increasing tuition fees, laying off teachers (because there are fewer and fewer children), reducing public holidays, making layoffs easier, cutting health expenditures, increasing property taxes and -- a much debated measure in the continent – getting rid of the $ 7.25 minimum wage. The last government already increased VAT, and fired many public employees (although not the 30% required by extreme market liberalists). No government, however, dared in recent years apply more than a few of these unpopular austerity measures, arguing that if the foreign companies (shipbuilding, textiles, food industries) left the island following new cuts to incentives, that would only exacerbate the perverse circle of unemployment-migration-a shrinking tax base-more debt. Foreign companies now pay 0-4% corporate tax. The expected tax of 10-15%, Puerto Ricans fear, will make them less competitive.

A 25% of the payments due on July 1 was debt issued by PREPA, the Electricity Company, which alone borrowed in the last 15 years a whopping 9 billion dollars.

How such a small island could accumulate a 72 billion dollars in debt it partially explained by history. Lost to Spain after the 1898 war, the status of commonwealth with the USA made Borikén totally dependent on the Federal government. Industrialization occurred in the 50s — manufacturing and pharma — but the surge in oil prices in the 70s caused the government to nationalize many large companies, like Telefonica and the Shipyards, thus bloating the number of state employees. In those same years, to attract investments, the corporate tax was cut to 0. The government and nationalized companies began to finance themselves issuing debt paper. To launch projects, like the health care reform, and infrastructures, like the island's aqueduct, it doubled its debt. Soon 1/3 of the state revenue had to be allocated to debt servicing.

Entering now the 10th almost running year of recession, with a default looming, solutions to the "death spiral", as the governor put it, are few and all painful. Puerto Rico cannot devalue its currency because it uses the US dollar. The economy is uncompetitive. The tax system includes a host of expensive benefits. Only 40% of adults are formally employed, the rest are unemployed or on social security. 

One option is a federal controlled board to determine how fiscal consolidation can be achieved, i.e. how to impose austerity, while keeping under control fears in Wall Street by rolling over due munies. The other is to default under Chapter 9 that applies to municipalities, like recently Detroit. However, this must be first approved by Congress, where the representative of the Commonwealth just stated that wages — those $ 250 million that the Puerto Rican government pays out every 15 days — are not at risk.
"Too little, too late", seems to be the mantra, especially as migration is concerned. Five million Puerto Ricans live in the US. According to sociologist Jorge Duany, those leaving are "mainly people between 18 and 44". Immigrants to Puerto Rico are leaving as well. Such is the case of professionals and even caregivers and domestic workers from Santo Domingo who worked for wealthy Puerto Ricans.
Like in Greece, too much time was let go by in inaction in Puerto Rico. Bernstein and Sondheim's lyrics in West Side Story come to mind. The first line New York Puerto Ricans sang went Puerto Rico, you lovely island, but the song wrapped up with When I will go back to San Juan … Everyone there would have moved here.