Puerto Rico’s Governor Garcia Padilla recently announced that Puerto Rico is unable to pay back its $72 billion dollar deficit and announced that the island’s economy is on the verge of collapse.
At the turn of the 19th Century the U.S. seized Puerto Rico from Spain and proceeded to destabilize its agricultural industry, composed of mostly small landowners and subsistence farmers by selling the majority of arable land to powerful U.S. corporations.
In addition, Puerto Rico was prohibited from negotiating its own bilateral trade agreements and had much of its economic growth limited by U.S.-imposed restrictions.
This has resulted in the commonwealth never being allowed to direct its own economic development.
Over time Puerto Rico, like many Caribbean islands, became dependent on the investments of the wealthy in the form of tax-free investments, such as municipal bonds.
In 2006 several provisions of the Puerto Rican tax code which allow investors to avoid federal and state taxes expired, causing a drop in investment revenue.
Since 2013 various hedge funds became interested in Puerto Rico as many of the commonwealth’s usual investors had become skittish around it’s steadily declining economy.
These hedge funds were able to purchase bonds from these frightened investors at a fraction of the cost due to their desperation to be rid of them.
Then result was that these hedge funds were left holding promises given by a commonwealth on the edge of collapse.
It is clear that the hedge funds were well aware of the risk, so why did they buy in?
The answer goes back to the same U.S. restrictions: Puerto Rico, unlike Detroit or Stockton, has no legal right to declare bankruptcy.
Since it cannot discharge its debts, the investors are guaranteed profit either way.
If Puerto Rico pays back the bonds then the bankers get the full value of the bond at a fraction of the price.
If Puerto Rico doesn’t pay them back, the bankers and their lawyers divide the spoils of the crippled country, which may end up being far more lucrative than Puerto Rico actually paying them back.
It may be that this is what the hedge funds were hoping for all along.
This is why hedge funds are lobbying hard against Puerto Rico’s petition to be allowed to declare Chapter 11 Bankruptcy.
If the bankruptcy goes through then the hedge funds lose millions and Puerto Rico gets to enjoy luxuries such as schools, clean water, and infrastructure.
In a rare moment of bipartisan solidarity both Presidential hopefuls Hillary Clinton and Jeb Bush have expressed that bankruptcy should be allowed to Puerto Rico.
Most recently, however, a U.S appeals court has struck down the petition, effectively putting the needs of hedge fund managers before a commonwealth where 41 percent of people live below the poverty line.
Photo: A homeless couple sleeps in front of a closed business in San Juan. Over 41 percent of Puerto Rico’s population lives below the poverty line. | Ricardo Arduengo/AP