Support radically independent journalism.
TRNN’s Jessica Desvarieux explores how investment funds OppenheimerFunds and Franklin Advisers are pressuring Puerto Rico to pay in full, while Congress won’t grant the island nation authority to file for bankruptcy. But is this a ploy to further privatize Puerto Rico?
JESSICA DESVARIEUX, PRODUCER, TRNN: In Puerto Rico how to solve the country’s $73 billion debt crisis is paramount. In part two of our series we’ll explore who benefits from the status quo and what Puerto Rico requires to change its economic future. In a special message, Puerto Rico’s governor declared the country’s debt unpayable. This news should not have been much of a surprise for investors, since just last year three credit bond rating agencies downgraded Puerto Rican bonds to junk status. Despite this low grading investors kept lending to Puerto Rico, a country which spends $3.7 billion a year just to service the debt. So knowing the government was in trouble, why would Wall Street continue to invest? Puerto Rican municipal bonds have a part to play. Under the law they have a special status exempting investors from paying local, state, and federal taxes even if they do not reside in Puerto Rico. This is known as triple tax exemption. The Real News interviewed economist James Henry to better understand investors’ motives. JAMES HENRY: And so that was very attractive, especially to the Wall Streeters who were able to talk Puerto Rico into issuing more and more of these things. And if you look at who owns these bonds, more than $11 billion of them are owned by U.S. bond funds. Big names like Franklin Templeton and Oppenheimer have gone deeply into Puerto Rican bonds, and also a lot of individual investors have been buying up these bonds. So collectively this is a big deal for the sake of those who’ve been investing in Puerto Rican community bonds. DESVARIEUX: These municipal bonds, however, do not qualify for bankruptcy protection. In other words as an unincorporated territory, unless Congress changes the law, Puerto Rico cannot file for Chapter 9. PEDRO PIERLUISI: Chapter 9 simply allows the state legislatures to authorize entities like let’s say the highway authority, and water and sewer authority, a city, a county that are having serious difficulty in paying their bills. Well, state [legislation] custom, this can allow them to go to bankruptcy court to reorganize themselves. DESVARIEUX: Puerto Rico’s sole member of Congress, Pedro Pierluisi, recently sponsored a bill that would allow Puerto Rico to file for bankruptcy. He argued that without this process creditors would have the upper hand, since they could sue Puerto Rico to pay in full. And in the end Puerto Rico could be forced to pay creditors before paying benefits like Medicare to the elderly. PIERLUISI: The only opposition, again, that I get for my bill, it’s a strong one and they’re playing hardball, comes from a few players. A few fronts who are heavily invested in this Puerto Rico [inaud.] power authority. Now, everybody else, academics, the financial community at large, in all their funds investing in Puerto Rico, bonds support it. I know there’s a hedge fund called Blue Mountain. There’s an entity called Franklin and Oppenheimer. There’s a few entities that are–and this is a matter of public record. They’re negotiating as we speak. And they have hired, engaged either directly or indirectly their lobbyists and placing ads, and recruiting other organizations to oppose the bill. DESVARIEUX: These funds, like Oppenheimer Funds and Franklin Advisor, together owned about $10.8 billion worth of bonds representing 15 percent of Puerto Rico’s debt as of March 31 according to the Wall Street Journal’s analysis. At a meeting held on July 13 in New York, these funds along with 300 representatives from various financial institutions, heard Puerto Rican officials make their case for restructuring its debt. The meeting focused on a report prepared by three former International Monetary Fund initials. In the report being called the Kruger Plan after its lead author Ann Kruger who was a former chief economist for the World Bank. In it it calls for the elimination of the federal minimum wage, tightening of welfare eligibility, and the repeal of, quote, binding constraints on employment such as paid vacations and holidays. Puerto Ricans have stood up to protest these austerity measures, which they see as hurting working families. But with no ability to file for bankruptcy or restructure its debt like sovereign nations, California State University Latino Studies professor Victor Rodriguez says Puerto Ricans are at the mercy of negotiating with hedge funds. VICTOR RODRIGUEZ, PROF. OF LATINO STUDIES, CALIFORNIA STATE UNIV: The problem is the United States has not helped Puerto Rico, because it doesn’t represent a real threat the economy of the United States. Because as I said, these are municipal bonds. Only that market may be affected. DESVARIEUX: So with no aid coming from Washington how would Puerto Rico be able to get more control of its financial future? One option is statehood, says Pierluisi. PIERLUISI: So you have the statehooders. It is the growing sector. It is definitely trending that way. We held a plebiscite in 2012 and more people voted for statehood than any other option, including the current status. So statehood is really the future. DESVARIEUX: A future that seems to be going nowhere in Congress since the referendum vote was non-binding. PIERLUISI: The forces that really do not want, not even for example statehood, which is a dream. I just see it as a myth, a dream. Is imagine the state of Rhode Island being willing to vote for the admission of a sate that will have automatically two senators, and maybe four to five, six, Congresspersons depending on if the population doesn’t continue to decline as it has declined in the last ten years. Close to half a million people have left. So those forces do not want Puerto Rico to be a state. In fact, I would argue it might be easier–it might be easier to get independence than statehood. DESVARIEUX: Independence is a battle that’s been fought for more than a century by the likes of Puerto Rican independence movement leader Pedro Albizu Campos, and currently imprisoned Oscar Lopez Rivera. And despite confronting strong U.S. opposition, today many Puerto Ricans cherish their American citizenship. Though draped in Puerto Rican independence flags during annual Puerto Rican day parades, independence polled weak among voters in the last referendum. Out of the 54 percent against its territorial status, only 5.5 percent voted in favor of independence. And the Puerto Rican Independence party has only one member in its legislative assembly. RODRIGUEZ: Puerto Ricans have always been told that they would die of hunger. The reality is that if you look at what Puerto Rico gets from the United States and what the United States, in terms of the corporations, get from Puerto Rico, there is a huge imbalance. Just in 2013 close to $35 billion were transferred to corporations in the United States. And that’s without even counting all the money that we pay to companies in the United States. Because we have to buy stuff from the United States. Well, the worst problem is that the age, the median age of the Puerto Rican population has increased. Which means that obviously it’s an older population. It will require more services, and there’s less young people in the workforce. So it’s a perfect storm to create I would say the social conditions for some kind of rebellion. But you know, unfortunately violence sometimes works. And when Puerto Ricans have rebelled violence has been inflicted on Puerto Ricans very, very strongly. Puerto Rico from 1948 to 1954-56 had a [muscle] law. For example, you could not even whistle the national anthem of Puerto Rico or show the Puerto Rican flag because you could be imprisoned. DESVARIEUX: Puerto Ricans will now be muscled by Wall Street to cooperate with the push to privatize its assets so it can pay back its debt in full. A move Rodriguez says is already happening. RODRIGUEZ: It’s like a garage sale going on in Puerto Rico. The airport was sold to a Mexican company. Two of the major cement companies were sold also to a Mexican company. And also even the [tollway], which is the [inaud.] press, which is one of the best toll ways and express freeways in the island, was sold. So all that income is then going to the government of Puerto Rico, and hopefully to pay for its schools. It’s being now used by these corporations who have bought those–by the way, and very cheaply. DESVARIEUX: So cheap that the country’s electric company, PREPA, may be next on that list. But with Congress stalling to give Puerto Rico an opportunity to file for bankruptcy and the country’s lack of fiscal sovereignty selling assets under market value might be the only option for the Puerto Rican government as pressure mounts from its Wall Street creditors to pay up by a looming August deadline. For the Real News Network, Jessica Desvarieux, Washington.
DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.