Puerto Rico’s debt situation
As you already know, Puerto Rico is in a debt crisis. It’s unsustainable – take a look at some of the numbers – and people are suffering. There’s very high prices, few jobs, and on top of that there’s a terrible drought as well. I’m trying this week to learn what some of the details are of this situation, which is incredibly complicated because Puerto Rico is a U.S. commonwealth, not a state, and has historically been ignored by the political system.
Here’s what I know. The bond markets for Puerto Rico have historically been attractive to investors because the bonds are “triple exempt,” which basically means no taxes are applicable to them. This made it too easy for Puerto Rico to borrow money and has put it in a hole, very analogous to the Greek situation. And now we have to decide how much the people should suffer for the results of the bond markets.
Yesterday I reblogged a post by Marc Joffe, who argued that the U.S. should extend Chapter 9 to Puerto Rico. Hypothetically this would allow Puerto Rico to declare bankruptcy and restructure its debts in some reasonable way. However, as Kristi Culpepper explained in this Medium piece (hat tip Tom Adams), it actually wouldn’t give Puerto Rico the relief that it needs, first of all because it would redefine Puerto Rico as a “state” but states are not eligible to declare bankruptcy, and secondly because the corporate bonds issued by Puerto Rico’s public corporations have a special status that also prevents them from restructuring.
Culpepper also notes in her piece that people who cry foul at the concept of restructuring debt after it has been issued can rest assured that there is precedent for it. Personally, I don’t even understand that complaint; surely everyone realizes that any debt might go into default, and it hardly matters exactly what that procedure looks like.
Culpepper recommends something else entirely, namely a federal financial control board. The idea is that there’s also precedent for this, in the 1990’s in Washington D.C.. However, it would essentially mean handing over control over its finances to the board. Culpepper notes that this could even happen without consent. I think the Puerto Rican people may have something to say about this. She also suggests we could provide liquidity for Puerto Rico if we wanted, although it might look something like a bailout.
The biggest problem is that, even now, no politician seems to really care about Puerto Rico, except to fight against it becoming a state.
mathbabe 
There are some weird structural problems that contribute to this situation.
Because PR is a commonwealth all ship-born products must be moved on US flag carriers which require US seamen, a very costly requirement (see Jones Act).
Another problem is the minimum wage is the same as the mainland. Because of the shipping costs this makes manufacturing in PR less competitive.
I’m not aware of any politicians, other than those in PR that are against statehood. The Puerto Ricans themselves have rejected statehood at each plebiscite.
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Culpepepper’s position does not necessarily contradict mine. Chapter 9 can be used for Puerto Rico cities and some public corporation debt. Other tools will be needed to reduce the Commonwealth’s general obligation debt service.
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Thanks, mathbabe! Because of your frustratingly interesting posts and links to more interesting posts, I just lost more than an hour of my day to get the work done that I needed to get done!
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Many apologies!
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‘Cabotage’ laws are not specific to commonwealths. Hawaii also has to use US flagged and built ships when shipping within the USA. Ships that arrive from foreign ports with foreign goods can go directly to Puerto Rico. They would not be allowed to continue from there to any other US port. The disadvantage to islands and to a lesser degree, Alaska, comes from not being able to take advantage of the interstate highway system.
I don’t know if it actually works this way but it is possible that ships from the US mainland could now travel outside the USA, stop at Cuba first, then continue to Puerto Rico, possibly doing an end run around the cabotage laws.
But at the end of the day, Puerto Rico, Greece, US home buyers, Chile, Students, Detroit, CalPers all have the financial advice of multi national investment banks in common. They all got in trouble using the numbers and growth estimates provided by these advisers to justify not collecting taxes from the advisers or their investments but rather to borrow from them instead.
It is amazing to watch. Greece borrowed 29bil unsecured from investors on the advice of investors to bridge them over while waiting for their investments to pan out. Germany and the EU turned interest into principle by using tax payers income to bail out those investors by lending tax payer money to Greece, on the advice of their investment banks in order to avoid destabilization of markets, That has now happened today on a much bigger scale than 29bil.
Now, using the financial power of monetary distribution, the Greeks are effectively under seige because they do not have their own food and energy supplies. In 1850 people would have called that being vulnerable to a blockade, today we call it globalization and imagine it is a good thing.
Under the reality of a seige that could be made worse, Greece knuckled under and was forced to put up 51 billion in physical assets to secure an 83 billion dollar loan for what was once a 29bil unsecured loan giving legal standing to the end of Democratic rule of what was once their own property.
Investment (hedge fund) adviser John Paulson has taken up residence in Puerto Rico because as a commonwealth they are a tax haven that lets you keep US citizenship. In 2010 Puerto Rico passed into law almost tax free benefits to the FIRE industries. Quite the gift to investment advisers but not so much to the people and former owners of Puerto Rico who will not have the opportunity to wait hand and foot on John Paulson in hotels while working for what is attempting to be renegotiated to less than the US minimum wage despite the higher than US cost of living! That will make a Puerto Rico relatively cheap at the expense of working Puerto Ricans, making it possible for Investments in hotels building to pay off especially if they are given tax advantaged status making more money available to Paulson rather than to the Puerto Rican Government. which will be provided with the hope of 8% annual returns to fund their retirements – but oops.
The US Post Office is being attacked because it once was a network of public banks and an option to being robbed by our investment advisers. Public banking should be required in every State as an option to private banking, If not, citizens need to do it themselves as banking co-ops.
The stocks most people have in their retirement accounts are probably worth close to zero after the first tier debts get paid.
It is well past time to take back control of our finances and our freedom.
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