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Ring in the new year, lay on the debt

TANYA THOMAS | Updated on January 22, 2018 Published on December 30, 2015

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What are we talking about ?

Apparently, governments aren’t done with defaulting just yet. We have another expected to go bust on the first day of the new year.

Who is going down this time?

Puerto Rico.

That’s sad. Where exactly is Puerto Rico?

It’s an island, territory of the United States, in the Caribbean region. Think tropical paradise, white sand beaches, holiday destination and a likely $1 billion bond default tomorrow.

Ouch! But a billion dollars isn’t a lot these days.

It is, when you can’t scrounge up enough to pay your lenders. And it is indeed sad that what was once a high-income region spiralled down to nearly half of all residents being poor in 2013.

How did that happen?

For the past decade, the state went through an economic downturn with its main industries — pharmaceuticals, electronics, tourism — taking big hits. With tax breaks being abolished in 2006, whole businesses left the island. Meanwhile, the country took on even more debt to keep it afloat, totalling to $72 billion now. And borrowing was easy, because Puerto Rican municipal bonds are exempt from a slew of taxes.

Investors kept buying these bonds even after they reached junk status. Therefore the moniker, the Greece of the Caribbean, appears to be well-earned.

So what’s the size of the default?

Roughly $1 billion in bond payments are due on January 1, of which the state says it can rustle up enough to settle about $330 million...

That’s not bad.

...by diverting cash from other bonds. The typical ‘robbing Peter, paying Paul’ scenario.

Can’t they declare bankruptcy? Like Detroit did?

Anybody else would have done so by now, since Puerto Rico’s debt is higher than that of most the US states. But because it’s a territory, and not a regular state, it doesn’t have access to the Chapter 9 bankruptcy code, leaving it with no legal mechanism to stay safe from creditors.

Then are they picking austerity, like Greece did?

That doesn’t seem a plausible option either. Some economists are recommending against austerity, or cutting down expenses by reducing the quality and reach of public services, cutting back on wages and pensions, etc.

Since Puerto Ricans are US citizens, and as a certain quality of life is forced down in their home state (remember this was a high-income region), they will simply migrate to the mainland, where life is much better.

According to Pew research, Puerto Rico’s population has fallen more in the past three years than it did in the three decades to 2000. Projections suggest the population will continue to fall by 1 per cent every year.

But as this happens, the tax base — the income-earners who will repay those bonds by their taxes — will simply fall. By insisting on austerity, bondholders will just lose any chance of ever getting their money back.

So it needs a bailout?

Any true Keynesian would tell you it needs more investment to haul itself out of the mess it is in. Growth policies, improving infrastructure, creating jobs that will make residents stay put and better fiscal management, will help the state return to its high-income credentials.

But that is the long and tedious path to recovery. For now, the US Congress can’t decide on how exactly it should help Puerto Rico. Until it does, we are more likely to hear of debt defaults, vulture-like creditors and a lot of unrest on the ground.

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Published on December 30, 2015
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