Once again, the Caribbean is making headlines in the United States. But this time it is not Cuba. It’s another island that has become the focus of American media, Puerto Rico.
While Cuba is a much bigger, more important place, Puerto Rico, despite its smallness, cannot be embargoed or ignored. For unlike Cuba, it has the merit of being a territorial possession of the United States. As such, the fiscal crisis there demands serious attention.
Indeed, late Sunday, months of delay and dithering finally yielded the dreaded default. Gov. Alejandro Garcia Padilla announced that Puerto Rico will fail to pay $370 million in bond payments due Monday after efforts to devise a solution came to naught.
Garcia said the choice was between making the payment and cutting essential services, including schools and hospitals. He said he would rather fail his creditors than fail in his responsibility to the people of Puerto Rico.
“We will continue working to try to reach a consensual solution with our creditors,” he said. “That is one of our commitments. But what we will never do is put the lives and safety of our people in danger.”
The $370 million is only a fraction of the total amount at stake, however. Puerto Rico’s overall public debt comes to more than $70 billion — also unpayable.
This is not something that required eleventh-hour emergency brainstorming. The crisis has been in the making for a decade. To be sure, the causes of the island’s plight are not simple, but the turning point seems to have come in 2007 after certain U.S. tax credits, officially known as Section 936, expired.
Thousands of jobs in the pharmaceutical, apparel, plastics, and rubber industries were lost. Meanwhile, government mismanagement compounded the difficulties.
The resultant statistics have been as bleak as they were predictable. The territory’s unemployment rate is 12.2 percent, more than double the 5 percent average rate in the United States. Its poverty rates are the highest in the nation. Over 50,000 of the island’s best-educated, most enterprising residents have been packing their bags for the mainland each year, seeking a better life in places like New York, Chicago, and the southeast.
If Monday’s decision triggers a chain of defaults, the consequences could be catastrophic. As investors take to the courts to sue for payment, a years-long saga of legal battles will ensue, the credit rating will collapse, and amidst economic turmoil the courts will order the government to do what it refused to do this week — cut back on vital services.
But the pain will not stop there. According to one think-tank scenario, failure to meet social needs will unleash a tsunami of crime, organized and otherwise, angry public protests, a state of emergency, and — voilà! — a failed state that Washington will have to take care of, whoever is president.
In his statement, Garcia blamed Congress for failing to pass a bill that would create a control board to help manage the crushing debt and to oversee some debt restructuring. He said it has been held up by “internal partisan and ideological divisions” in the House of Representatives.
While it is true that the stalemate has been laced, as usual, with partisan politics, the technical sticking point has been Puerto Rico’s unique status as a possession but not a state. As such, it cannot take advantage of Chapter 9 bankruptcy proceedings, which could provide a way out.
The notion of changing the law to allow Puerto Rico to access Chapter 9 has run aground on Democrat-Republican shoals. The former view it favorably, but the latter warn that such a move could encourage a number of financially troubled states to follow suit, and thus threaten the stability of the entire U.S. municipal bond market.
To answer that question, President Barack Obama and Treasury Secretary Jacob Lew have supported creating a special bankruptcy power for Puerto Rico’s special case, one that would not invoke Chapter 9, along with some tax incentives to bolster the economy. But Republicans have been reluctant to go along.
Instead, a draft bill co-sponsored by House Speaker Paul Ryan and Rob Bishop, chair of the House Natural Resources Committee, which has jurisdiction over Puerto Rico, right now looks like the most likely type of solution. It calls for a five-person oversight board to run fiscal policy in Puerto Rico and impose an austerity budget, as well as a stay on litigation that bondholders oppose.
The idea of such an oversight board has until now been treated with outright scorn by the local ruling elite. García himself has branded it a “shameful and degrading” measure to deprive the island “of its own government.” Yet, desperate situations require desperate measures, and this week the governor apparently conceded that some type of external oversight mechanism was necessary to save the island from chaos.
By contrast, the people of Puerto Rico are much more amenable to such a solution. A recent poll showed that 71 percent favored an oversight board. Whatever diminution of self-rule it entails no doubt seems a small price to pay to avert the scarifying alternatives. It didn’t take them a think tank to think their way through it, either.
Whether it be the Ryan-Bishop bill or some other device, it will have to be decided by the governments in Washington and San Juan. But action must be taken, and soon, if this island is not to sink into a maelstrom of deadlock and default.