On Monday, U.S. territory Puerto Rico defaulted on $422 million in debt payments. On July 1 the island commonwealth will likely be unable to pay its next commitment, a breathtaking $2 billion.
As with any big disaster, there are many causes of the Puerto Rican financial debacle, some of which go back to the early twentieth century. A lot of fingers are being pointed at the Puerto Rican government, but while they certainly haven’t helped the situation, there’s plenty of blame to go around. And while it’s been headline news this week, with the situation just recently reaching critical mass, the debt problem in Puerto Rico has been growing for the last fifteen years. Congress could have intervened at any time in the last decade to head off what’s happening today.
The problem in Puerto Rico is, in many ways, a lot like Greece and is an object lesson in simple economics. If you don’t have any tax revenue, you can’t pay your bills. If your populace doesn’t have jobs, they end up starving on meager government assistance programs. Puerto Rico is also a study in contrasts. While taxes are high on the average citizen, the territory is a tax shelter that courts wealthy elites with promises of low taxes. Billionaire Nicholas Prouty has turned San Juan’s marina into a haven for the elite, advertised as a home for mega-yachts 200 feet or longer. Just a few blocks away from the luxurious marina native Puerto Ricans live in unemployment and grinding poverty.
How We Got Here
For eighty years the U.S. government encouraged investment in Puerto Rico through tax breaks, passed in 1976, which created a massive manufacturing bubble. In 2006 Congress rolled back the tax breaks and investment fled the country. Puerto Rico turned to debt in the form of junk bonds to cover its budget shortfalls.
Not Their First Default
The first bond payment default by Puerto Rico was actually in 2015, so what’s happening today, while serious, is hardly news. The even larger problem looming is a $1.9 billion dollar payment due in July. In total, Puerto Rico needs to come up with seventy-two billion to pay off its creditors. The government of the commonwealth wants creditors to take a cram down on the bonds but, so far, none of the bond holders are budging. A few are even asking Puerto Rico to hand over its retirement and pension funds and let the country collapse into chaos.
Congress to the Rescue
House Speaker Paul Ryan is desperately trying to get a debt restructuring plan through Congress. Progress on that solution is being complicated by a dark money group calling the plan a bailout in television ads, even though the arrangement Ryan is advocating costs U.S. taxpayers nothing. The strategy would empower a special federal oversight board to restructure the territory’s debt payments, a plan similar to what was done in Detroit. The ads and pressure on Republican representatives in Congress are likely coming from creditors who don’t want to see their returns reduced.
How Long is the Fuse on the Debt Bomb?
By itself Puerto Rico probably isn’t enough to kick off a debt bomb here, but take their debt, add another building housing crisis, combined with layoffs from slow growth and suddenly it’s 2008 all over again. Disasters are frequently the result of a long string of incidents which, individually, wouldn’t be major crises. But it’s when small things start to build on one another that big disasters arise.
Hopefully Congress will limp across the finish line in time to avoid Puerto Rico becoming the fuse that detonates a bigger crisis. Unfortunately, Congress hasn’t been able to do much of anything and counting on them to avoid a financial crisis seems like long odds at the moment.