On June 28, the Governor of Puerto Rico told the world that the island’s debts are not payable. “It’s not politics” he told the New York Times, “It’s math.”
Like many impoverished debtors, Puerto Rico chose to live beyond its means not because of greed but because it lacked the means to survive. After years of economic decline following military base closures, a financial crisis and a collapse in manufacturing, running large deficits was what the island had to do to prevent further unemployment, poverty and emigration.
A slow deterioration of the island’s credit rating has forced the government to balance its budget, raising taxes and cutting spending on an island where there has been chronic double-digit unemployment and half the population lives in poverty. These austerity policies have inflicted yet more suffering on Puerto Ricans – a majority of whom depend on the government for some type of support – which in turn has led to even more people leaving for the mainland.
Yet when Puerto Rico asks its creditors, many of them wealthy fund managers, to share some of the pain, they run into a problem: The creditors hold all the cards.
Normally a local government can declare bankruptcy and force the creditors to settle, but Congress forbids U.S. territories from declaring bankruptcy, and the Republican majority has no interest in changing that. The island can only legally fail to pay certain ‘moral obligation bonds,’ and is contractually obligated to pay all other debts. If it fails to do so, the hedge funds could take the island to court and force it to pay.
Since Puerto Rico can’t pay, and with bankruptcy unavailable, the only practical resolution is for the creditors to accept their loss and settle with Puerto Rico’s government. However, a few of the island’s wealthiest creditors won’t even accept the fact that Puerto Rico is broke. Instead, they commissioned a report by former IMF economists ironically called “For Puerto Rico, There Is A Better Way.”
Unsurprisingly, this ‘better way’ involves the hedge funds getting all their money back and Puerto Ricans getting the raw deal. To make sure the hedge funds get their money, the plan goes, Puerto Ricans would have to give up urgently needed social programs and slash education spending and health care benefits. The government in turn will have to privatize its assets and enact "structural reforms," – in other words, deregulate the labor market and break unions. In exchange, this mini-troika will offer emergency lending to the island.
But not only are such measures unjust, they are also unsound. The hedge funds could not care less about the well-being of Puerto Rico’s citizens, nor do we expect them to.
But they are deluded if they think imposing Greek-style debt servitude on the Puerto Ricans will bring them their money back. Not only has austerity impoverished Greece, but it has left them even less capable of paying its creditors. Even the International Monetary Fund has admitted, at least privately, that they broke the Greek economy, that privatizations have not raised as much money as predicted, and that despite all the bailouts, Greece’s creditors need to take a very big loss. It is better for Puerto Rico’s creditors to take the small loss now rather than a big one later.
When the Republicans claim that giving Puerto Ricans bankruptcy protection is a bailout for badly behaved governments, they are missing the point. The real bailout would be once again making creditors immune from the consequences of their actions, that no matter how ill-advised the lending decision, the government will always make sure you get returns. A world where Puerto Ricans make all the sacrifices and wealthy hedge fund managers make none is unfair and unsustainable.
