An announcement Monday confirmed that
the US will not be bailing out Puerto Rico. The island country faces a $72
billion debt due Wednesday, July 1st. Puerto Rican Governor Alejandro
Garcia Padilla admits to The New York Times: “The debt is not payable.”
To put things into perspective, $72
billion is nearly 100% of the island nation’s annual economic output. “This is
not politics, this is math,” says Padilla. The Governor hopes to restructure
the debt under the US bankruptcy code as it faces running out of cash.
According to Padilla, the goal would be
to negotiate with bondholders, hopefully postponing the payments long enough
for Puerto Rico to create jobs and accelerate its economy.
But the situation is complicated.
Default isn’t an option because according to US law, states cannot declare
bankruptcy (only cities). Puerto Rico is classified as “commonwealth" -
neither state nor city - making it unclear how this problem is to be
solved.
According to Josh Earnest, White House
press secretary, the administration is hoping Congress will approve a
bankruptcy “mechanism” under Chapter 9 that would allow Puerto Rico’s public
corporations to declare bankruptcy. He also admitted: “There’s no one in the
administration that’s contemplating a federal bailout of Puerto Rico.”
A recent analysis shows that this US
quasi-colony has seen virtually zero economic growth since the closure of Section 936 in 1996 pushed most US
corporations off the island.
On top of that, the North American Free
Trade Agreement eliminated the island’s advantage as a Latin American country
with free, easy access to US markets. Add the combination of rising oil prices,
removal of tax preferences from manufacturers, a housing price bust, and the
2009 mainland recession in the US and you get a 14% unemployment rate with over
30,000 citizens fleeing the island every year.
And it’s not just Puerto Rico
suffering. The municipal bonds making up the debt went into nearly 2/3 of all
the pensions and retirement plans in the US. These plans are at risk of losing
billions.
Throughout this string of bad luck, Puerto Rico’s
shocking lack of responsibility led to decades of overspending and borrowing.
If Congress were to pass a law allowing Puerto Rico to declare bankruptcy –
similar to what happened with Detroit in 2013 – the country could start to
restructure the debt. The stakes are simply too high for us to turn our backs
now.
Comments
Prior to 1996, IRS Section 936 provided Tax
Credits to corporations operating in Puerto Rico. In 1996, these tax credits were
removed from this section. Corporations left to cut costs and citizens left to
find employment.
The Puerto Rican government should have then
frozen hiring and established a decreasing budget plan. They did not do enough
to avoid this debt. Instead they
continued to overspend by a total of $72 billion while their GDP declined.
Norb Leahy, Dunwoody GA Tea Party Leader
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