Puerto Rico's Debt Crisis

Tomorrow, the government of Puerto Rico has a debt payment due of $354 million. News reports indicate that the commonwealth may be able to cobble together the money to make this payment but, as Governor Alejandro Padilla has correctly said, the overall debt of the island’s government is “unpayable.” A yet larger payment is due on January 1. Puerto Rico’s total debt now stands at $72 billion. The issue has garnered relatively little attention in the mainstream media in the states, but the ramifications for how this crisis is resolved could scarcely be more important.

I wrote about this issue in August when the island’s religious leaders called for the U.S. government to become more involved in the negotiations between the Puerto Rican government and those who hold its debt obligations. The effort, led by Archbishop Roberto Gonzalez of San Juan, Puerto Rico and the Rev. Heriberto Martinez Rivera of the Puerto Rico Bible Society, one of the island’s largest Evangelical groups, specifically suggested that the Federal Reserve use its wide ranging authority to encourage the bond holders to negotiate in good faith. If Fed Chair Janet Yellin so much as raises her eyebrow, good things can happen for Puerto Rico in the bond markets. In September, Archbishop Gonzalez and Rev. Martinez Rivera were in Washington for meetings at the White House and on Capitol Hill to urge a settlement. The religious leaders have been greatly assisted by JubileeUSA, a faith-based group that focuses on issues of sovereign debt and whose director, Eric LeCompte, is both exceedingly knowledgeable about these complex legal and fiscal issues and has the heart of a saint. Legislation that would allow Puerto Rico to procure bankruptcy protection, as any U.S. city could, has been stalled.  

A significant portion of Puerto Rico’s debt was purchased by vulture funds, hedge funds that purchase sovereign debt from distressed countries at pennies on the dollar and then demand repayment at full face value of the debt bonds. These same vulture funds have thrown a lot of money around Capitol Hill to make sure that Congress does not impede them from collecting their exorbitant profits, even if such profits can only be achieved by forcing governments to adopt austerity measures that disproportionately harm the poor. Further, such austerity measures do not solve the underlying economic problem, in Puerto Rico or anywhere else: The poor get poorer, the middle class flees, and the economy is in worse shape than before.

The moral contours of the argument remain obvious. Puerto Rico is the poorest jurisdiction in the United States with the poverty rate hovering around 40%. The unemployment rate remains in double digits. Puerto Ricans are uncovered or under-covered by certain social programs like Medicare and Medicaid. Expecting poor people to be made yet poorer so that vulture funds can make a 300% profit rather than a 100% profit is the very definition of moral obscenity.

When Pope Francis criticizes rapacious capitalism, as his predecessors before him did too, this is the kind of situation he is talking about – and he knows from where he speaks! As this chart shows, some of the same vulture funds that forced austerity measures on Argentina in 2001 are at work in Puerto Rico today. “We’ve reached a critical moment in the debt crisis,” LeCompte said last week in a press statement. “3.5 million American citizens are on the front lines of a humanitarian crisis that will only get worse if we can’t fix the island’s debt problems.”

On top of all that, Puerto Rico is in the midst of a drought. The government can’t control the rain, but it can better address the fiscal crisis.

If the moral situation remains unchanged, the political situation has developed in ways that strongly suggest a bipartisan solution. Puerto Ricans are U.S. citizens and in recent years many of them have fled the island to look for work in the states. Most of them settle along the I-4 corridor in Florida. Yes, that Florida, the perennial swing state which President Obama carried in 2012 by a mere 70,000 votes in 2012, and a more substantial but still close 236,000 votes in 2008. Estimates vary, but between 300,000 and 500,000 Puerto Ricans have relocated to central Florida in recent years. They are citizens and they can vote as soon as they register. That fact should catch someone’s attention, no?

The Republican presidential nominating contest is still in a parallel universe, so we can’t expect much leadership from there. But, Speaker Paul Ryan knows that two House seats currently considered “toss-ups” by the Cook Political Report are in Florida, and Sen. Mitch McConnell knows that he needs to hold on to the seat currently held by Sen. Marco Rubio if he wants to remain Majority Leader. Republicans running for the White House might not be able to discern the need to help Puerto Rico. Republicans in Congress have a clear political self-interest in doing so.

The Obama administration has become more active in looking for a solution to the crisis, which is all to the good. But, it is time for the administration and congressional leaders to look beyond the fiscal crisis, to begin plans for rebuilding the Puerto Rican economy. And, in the event, there is a remedy at hand. Puerto Ricans currently pay the highest electricity rates in the country yet they only procure 1% of their electric power from sustainable energy sources. Gas and oil must be shipped to the island, and the rates are so high some ships now bring their own generators so they do not have to pay the higher rates when docking. These high costs of energy are a further impediment to economic development. The administration should consider ways to make Puerto Rico the poster child for transitioning to sustainable energy: The island has abundant solar and wind resources currently untapped. In most of the fifty states, the transition to sustainable energy makes environmental sense but, with record low prices for gas and oil, there is little economic incentive to make the transition. In Puerto Rico, the transition makes both economic and environmental sense.

There will be a political price to pay if either party stands in the way of a solution for Puerto Rico’s crisis, and that price will be paid in central Florida next November. Republicans should jump at the chance to get this issue off the table and Democrats should be eager to solidify their standing with Latino voters generally. The dollar amount in question is large for Puerto Rico but is small by D.C. standards. It is time for the politicians – and the Fed – to follow the lead of the religious leaders, protect the poor, let the vulture funds take the first haircut, and then work to rebuild the island’s economy.