Puerto Rico’s Debt Trap
WASHINGTON, DC – The Caribbean island of Puerto Rico – the largest United States “territory” – is broke, and a human calamity is unfolding there. Unless a constructive course of political action is found in 2016, Puerto Rican migration to the 50 states will rival the scale of the 1930s Dust Bowl exodus from Oklahoma, Arkansas, and other climate-devastated states.
With public debt service (principal plus interest) projected to reach nearly 40% of government revenue in 2016, Puerto Rico needs a new set of economic policies. But austerity will not work; this must be an investment-led recovery, with official measures oriented toward boosting growth by reducing the cost of doing business.
The question is whether Puerto Rico will have that option. Much of its $73 billion debt has been issued by government corporations. But, though federal law allows such municipal debt to be restructured under Chapter 9 of the bankruptcy code in all 50 states, this does not apply to US territories like Puerto Rico. As a result, a protracted series of confusing legal battles and selective defaults looms. The cost of essential infrastructure services – electricity, water, sewers, and transportation – will go up while quality declines.
One response has been to demand further belt-tightening, for example, in the form of wage reductions and healthcare cuts. But residents of Puerto Rico are also US citizens and they vote with their feet – the population has fallen from 3.9 million to 3.5 million in recent years as talented and energetic people have moved to Florida, Texas, and other parts of the mainland.
The more creditors insist on lower living standards and higher taxes, the more the tax base will simply leave the island – causing bondholders’ losses to rise. Disorganized defaults by public corporations will make it hard for any part of the private credit system to function.
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