This article is an update on the fast-developing situation surrounding the economic crisis in Puerto Rico. For detailed analysis and background, readers are encouraged to also see Emile Schepers’ article, Republicans plan Detroit-style emergency manager for Puerto Rico, which appeared in People’s World on April 4.
Events in Puerto Rico took a dramatic new turn this week, as both houses of the Legislative Assembly voted to give Governor Alejandro García Padilla the authority to suspend payments to bondholders until January 31, 2017.
Last year, the governor publicly declared that Puerto Rico’s $72 billion debt to bondholders, many of them hedge funds, is unpayable. Efforts by his government to find a solution, in both the U.S. federal courts and the U.S. Congress, have so far been fruitless.
Federal courts have ruled that Puerto Rico cannot use Chapter 9 bankruptcy to restructure its debts. The case is now before the Supreme Court but how that body will rule is anybody’s guess. In the U.S. Congress, progress has been nonexistent.
The only proposal the majority of Republicans in the U.S. House of Representatives have been willing to put forth is one which would practically mandate a Congressional takeover of Puerto Rico, essentially erasing the limited autonomy the island now enjoys under its “Commonwealth” or “Free Associated State” (Estado Libre Asociado) arrangement with the United States.
Most Puerto Rican political leaders angrily rejected the Republican bill, which, among other things, gives credence to the argument of many in Puerto Rico and around the world that the “Commonwealth” status of the island is a sham – a fig leaf used to disguise what is essentially U.S. colonial control.
In depositions to the United Nations Special Commission on Decolonization, the U.S. has used the limited autonomy of Puerto Rico to argue that it is not a colony; the Republican bill in the House would rip away that mask. The Decolonization Commission stated in 2013 that the Puerto Rican people have an “inalienable right to self determination and independence,” and that Puerto Rico is “a Latin American and Caribbean nation with its own unequivocal national identity.”
If all Puerto Rican government affairs are essentially to be run by a five-person board appointed by the President of the United States (from a list provided by the Republican heads of the U.S. Senate and House of Representatives), and only one of the five has to be Puerto Rican, the United States can hardly claim that the present situation is anything but colonial.
The Puerto Rican government has already imposed painful austerity measures on the population, leading to even higher unemployment, sharp declines in public services, and an exodus of the population to the U.S. mainland. As they possess U.S. citizenship, Puerto Ricans can move to the 50 states without legal difficulty, but they often face discrimination and poor living conditions after arrival.
The austerity measures have brought about protests by Puerto Rican government pensioners, who are seeing their benefits slashed as the pension fund faces the threat of total insolvency. Dealing with heavy cuts to their programs, college students this week also took to the streets and shut down several campuses of the University of Puerto Rico.
Due on May 1 of this year is the $422 million owed to debt-holders by the Government Development Bank, which is estimated to only possess capital of $600-$700 million to pay all obligations. On July 1, even larger amounts, almost $2 billion, are due to be paid by other Puerto Rican government entities. The funds held by the Government Development Bank also include the deposits of municipal governments and other public entities throughout the island, thus placing the whole Puerto Rican fiscal system in danger if it is forced to empty its coffers for debt payments. Obviously, the crisis is coming to a head.
On Monday of this week, several hedge funds filed suit to freeze disbursements by the Government Development Bank to municipalities and government agencies until the money owed to bondholders is paid first. This would have meant that practically all funds to pay for basic human services in Puerto Rico would have been redirected out of the country. It would be a disaster for many people, including municipal government employees and recipients of government services. If not stopped, it would have been a political disaster as well, as it is election year in Puerto Rico.
Governor García Padilla and his centrist People’s Democratic Party (PPD) caucus acted swiftly in both houses of the bicameral legislature. On Tuesday, the Senate approved, by a vote of 16 to 9, a bill authorizing the governor to suspend not only the bond payments owed by the Government Development Bank, but also all payments owed by other government entities as well, until January 31, 2017. A day later, the House of Representatives approved a similar, but not identical bill by a vote of 26 to 21.
Both votes were party-line, with senators and representatives from García Padilla’s PPD supporting the legislation and the more conservative, pro-statehood New Progressive Party (PNP) opposing. Senator Larry Seilhamer, leader of the PNP in the upper house, denounced the bill as a violation of the U.S. and Puerto Rican constitutions, a blow against retirees who have invested in Puerto Rican debt, and a step closer to “dictatorship.”
The Governor’s action was also criticized from the left. Senator María de Lourdes Santiago, who is running for governor on the ticket of the Puerto Rican Independence Party, said that the final bill gives too much implementation authority to an untrustworthy governor who will personally benefit politically. Another left-wing gubernatorial candidate, Rafael Bernabe of the Working People’s Party (PPT), thought the moratorium necessary, but he criticized García Padilla’s government for waiting so long to take action.
In response to the bill, the price of Puerto Rican bonds quickly dropped as creditors reacted negatively. Stephen Spencer, a financial advisor to Puerto Rico’s bondholders, told the press that the debt payment moratorium “would likely close the door to anyone extending new credit to Puerto Rico.”
But Governor García quickly signed the bill, and the head of the Government Development Bank, Melba Acosta Febo, says that regulations for implementation will soon be issued by the governor’s office. However, several amendments have now been proposed to the legislation as passed and signed, which will be considered next week.
So the wolf has been temporarily blocked at the door, but the problem of Puerto Rico’s economic decline and financial insolvency is by no means solved. Nor is it likely that the U.S. Congress will pass legislation to do so in the near future.
The fundamental problem is that the Puerto Rican model of development, sometimes called Puerto Rico’s “economic miracle”, is fatally flawed. From the days of Governor Muñoz Marín in the 1940s and 1950s, the idea has been to develop Puerto Rico by attracting U.S. and other foreign corporations to set up manufacturing operations in the island, thus providing employment and income for what was previously a very poor farming population.
But this only worked if Puerto Rico could have favored status under U.S. tax laws while also offering a relatively low-paid labor force for investors. Corporate globalization has created a situation wherein poor countries are forced to compete for foreign investment, with each trying to offer the cheapest labor and the laxest regulatory climate. The favored tax status of Puerto Rico is a thing of the past, and the country must now compete with Haiti, the Dominican Republic, Jamaica, and other poor countries to attract industry. Meanwhile, a fertile tropical island which used to be self-sufficient for food now imports, at high prices, up to 87 percent of its food.
If this model of development has proved, in the long run, to be a disaster for Puerto Rico, it is no less the case for all those other poor countries. The question is: when and how will this situation be turned around?
Photo: Puerto Rico Gov, Alejandro Javier Garcia Padilla testifies on Capitol Hill in Washington, Dec. 1, 2015, before the Senate Judiciary Committee hearing on Puerto Rico’s fiscal problems. Pablo Martinez Monsivais | AP