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.