CONGRESS NEEDS TO ACT ON THE PUERTO RICAN DEBT! BUT, WILL IT?

The Commonwealth of Puerto Rico has been a U. S. Territory since 1898, following the end of the Spanish-American War.  As American Citizens, Puerto Ricans can migrate freely to the Mainland.  Historically, New York City (and the surrounding region) has been the main destination; however, in more recent times, Florida has been the magnet, perhaps due its proximity to the Island, its large Hispanic population and similar climate.

Puerto Rico’s population is down to 3.55 million, while approximately 6.0 million live on the Mainland. The Island’s area is also quite small at 5,324 square miles, just 8.1% of that of Florida.  The Puerto Rican Gross Domestic Product, of goods and services produced in 2014, was just $103.13 billion, or $29,429 on a per capita basis.

The migration of Puerto Ricans from the Island has been going on since the mid-20th Century; however, it has increased somewhat of late as large corporations left following the elimination of certain tax preferences.  Younger, middle-class workers also left with the jobs; which, as a result leaves a population, back home, that is largely a combination of: retirees; young children; disabled residents and a 12.6% Unemployment Rate.

Puerto Rico is in a No-Win situation and the Republicans, who control both houses of Congress, are hesitant to act.  Perhaps that’s because Puerto Ricans, both on the Island and on the Mainland, tend to vote Democratic.  But, the economy in Puerto Rico is in a shambles, with: Personal Income stagnating; Consumer and Business Spending declining, and there is a negative 0.5% Deflation Rate.  Deflation (the opposite of Inflation) generally leads to a further-weakening economy, a reduction in bank lending and greater unemployment.

The only possible options currently are for Puerto Rico to choose between:  making their debt payments on $72 billion in bonds; paying creditors (including pensioners and tax refunds); or reducing such basic services, as police and fire, health care and education.  And that dilemma, unfortunately, will just cause more and more people and businesses to flee the Island, and thus further weaken the Commonwealth’s economy.  Unfortunately, none of those current choices will solve the debt problem.


The Commonwealth of Puerto Rico does not currently have the legal ability to file for (what’s called) Chapter 9 Bankruptcy Protection, under U. S. Law.  Basically, the situation for the Commonwealth can only go from bleak to worse.  The flight of Puerto Ricans fleeing the Island will quickly accelerate if: pensions are delayed; health care is greatly reduced; public safety is cut-back and schools become overcrowded.  And yet, defaulting on its debt will only cause significant legal problems, considerable expenses and preclude any ability to borrow money again in the foreseeable future.

Congress seems to be blind to the dire straits that the Commonwealth of Puerto Rico is in.  Unfortunately, in the U. S, there is always an election around the corner, and it seems that the moneyed-interests, that own much of Puerto Rico’s debt, know how to get the legislators attention.  When money talks, Congress listens!

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  1. #1 by Herb Smith on January 2, 2016 - 1:35 AM

    The downward cycle you describe also occurs in economically-depressed cities and states. The loss of business and employment results in loss of revenues, increased tax burdens, increased concentration of higher-cost populations, which results in more migration, and loss of more business and employment.

    Unfortunately, Republicans have been unresponsive to the needs to poorer cities and poorer states. They seem to believe that programs to assist poor people are adequate, and governments never need more assistance because of falling on hard times.

    • #2 by cheekos on January 2, 2016 - 5:05 AM

      I agree that similar events also happen in cities and counties on the Mainland. In many cases, however, some of that flight of residents remains within a related, but larger taxing jurisdiction. For instance, Detroit is within both Wayne County and the State of Michigan. On the Island of Puerto Rico, however, the outflow is totally outside of any related taxing authorities–and completely off the Island.

      But Mr. Smith’s point is quite appropriate, In effect, some of our formerly great cities are, little by little, becoming urban wastelands, in the midst of suburban wealth.

  2. #3 by cheekos on March 7, 2016 - 4:39 PM

    The linked article from today’s Miami Herald provides a great deal of current information on the Puerto Rican Debt Crisis. Miami, even more than New York or Washington, is more in tune with what is going on in Latin America and the Caribbean. That link is as follows: http://www.miamiherald.com/news/business/biz-monday/article64452617.html.

  3. #4 by cheekos on March 11, 2016 - 2:49 AM

    In the midst of the current discussion about Puerto Rico’s financial woes, there are two major mutual fund companies–Franklin and Oppenheimer–that are among the very largest owners of the Island’s debt—not only of the Commonwealth, but of local issues, as well. The fund companies are mostly concerned about the negative fall-out that an actual default would mean for the bond funds that it sells.

    The actual financial risk, however, would be born by the many investors who own such funds. In July of 2014, I provided a warning on such risk, in a blog post linked as follows; https://thetruthoncommonsense.com/2014/07/02/muni-bond-investors-should-be-especially-vigilant-of-puerto-rico-bonds-or-those-of-any-other-u-s-possession-or-territory/.

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