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Economist James Henry breakdowns the hedge funds, bond holders, and wealthy individuals who have benefited from Puerto Rico’s triple tax exempt status

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JESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore. Puerto Rico has avoided default for now, at least. The Caribbean U.S. territory still has more than $70 billion in outstanding debt to go. Governor Alejandro Garcia Padilla has said that the country won’t be able to pay that all back. In an interview with the New York Times, the Puerto Rico governor said, quote: The debt is not payable. There is no other option. I would love to have an easier option. This is not politics. This is math. Now joining us to help us break down the numbers and the history behind Puerto Rico’s debt is our guest James Henry. James is a leading economist, attorney, and investigative journalist who writes extensively about global issues. Thanks for joining us, James. JAMES HENRY, SENIOR ECONOMIST, TAX JUSTICE NETWORK: You’re very welcome. DESVARIEUX: So James, there’s really a lot at stake here. I mean, Puerto Rico’s unemployment is more than twice the U.S. national rate. The poverty level is nearly double that of the poorest U.S. state. Like I said, a lot at stake. So let’s have our viewers understand, how did Puerto Rico even get here and who does it actually owe money to? HENRY: Well, Puerto Rico has been borrowing to pay its bills, its tax base has lingered. There’s a lot of tax evasion going on, especially of sales tax. Maybe $800 million a year. But they’ve accumulated not only a $72-73 billion debt, but they also have about $50 billion of semi-funded pension liabilities, and that’s consuming 40 percent of their government budget. So they’ve come to a situation where they can no longer afford to pay this, these huge obligations. And raising taxes might have been an option a while ago, but they’ve really suffered I think from the combination of being far too reliant on debt at a time when growth has slowed and there was a big recession. The population on the island has been shrinking about 1 percent a year. It’s about 3.6 million. So they’ve ended up with a per capita debt burden here just slightly less than Greece. In fact if you add in the pension debt it’s greater than Greece, $40,000 per capita. DESVARIEUX: What about municipal bonds, what role does that play? HENRY: Yeah, the difference with Greece is that you know, in this case, Puerto Rico was funding its borrowing by issuing municipal bonds that were basically Puerto Rico Commonwealth bonds, that are, have been granted triple tax-free status. They don’t pay–if you receive interest on these relatively high-yield bonds you don’t pay federal, state, or local taxes. 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 have been investing in Puerto Rican muni bonds. So unlike the Greek situation where there’s almost no U.S. exposure, in this case we have a substantial amount of exposure. And it all adds up to a bankruptcy, potentially, on about four times the size of Detroit’s, which was the largest U.S. municipality. DESVARIEUX: But right now Puerto Rico isn’t eligible to claim bankruptcy. Is that right, James? HENRY: That’s right. It’s a commonwealth and not a municipality or–so it’s not allowed to go into Chapter 9, which is what Detroit was able to get a federal judge to allow it to do. That means that if there’s no bankruptcy here then Puerto Rico’s really in the kind of Greek situation where the creditors are not going to have to share the losses and there’s going to be a big burden placed on Puerto Rico if it wants to borrow any more. It’s running about a 5 percent GDP deficit every year so it needs that borrowing. It’s going to have to, you know, cut spending, which [would be] very painful. Or try to find new sources of tax revenue, like a new form of sales tax. So this is–you know, bankruptcy would be the preferred option. But as we’ve seen in the case of Greece and many other sovereign entities, and Puerto Rico is still in that category, unlike private companies or individuals there is no orderly procedure for a lot of these sovereign entities. And Puerto Rico is now going to Congress and asking for permission to be allowed to file bankruptcy. DESVARIEUX: As people are following this story do you anticipate certain developments? For example, you mentioned Detroit being similar to Puerto Rico. Should we be looking out for privatization of some of these public assets in Puerto Rico? HENRY: Well I mean, Puerto Rico’s going to have to scamper to find ways of paying off its creditors. One of the options here in addition to raising taxes from, or improving tax enforcement, would be to sell off private assets, privatize government assets. And that’s one of the first things that a bankruptcy court would look at. It would try to have an adjustment plan prepared by Puerto Rico, but also have the creditors share part of the burden. And that’s what the Congress is going to have to decide here, whether it really wants to help Puerto Rico out of this situation, allow it to enter a bankruptcy court and have this orderly procedure. Right now the Congress is spending about $22 billion a year in aid and, federal aid in Puerto Rico. So it’s a big factor in the Puerto Rican economy. It’s about 20-25% of GDP. There’s also a lot of remittances that are being sent to Puerto Rico by folks working here. So there’s a lot of connectivity between the U.S. economy and Puerto Rico that doesn’t allow us to just turn our backs. DESVARIEUX: All right. James Henry, joining us from New York. Thank you so much for being with us. HENRY: You’re quite welcome. DESVARIEUX: And thank you for joining us on the Real News Network.


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James S. Henry is an investigative economist and lawyer, a Global Justice Fellow at Yale University, and a Senior Advisor at the Tax Justice Network. Previously, James served as Chief Economist at the international consultancy firm McKinsey & Co. As an investigative journalist his work has appeared in numerous publications like Forbes, The Nation and The New York Times.