Puerto Rico Debt Crisis: ‘A Great Depression That Doesn’t End’
Journalist, author, and Democracy Now! co-host Juan Gonzalez says the Puerto Rican debt crisis, now entering a critical bankruptcy phase, results from a legacy of U.S. colonial domination and predatory Wall Street debt
AARON MATE: It’s The Real News, I’m Aaron Mate. Puerto Rico is entering its debt restructuring hearing for $123 billion debt it cannot possibly pay. The process is expected to take years, largely because of the island’s special status which prevents it from normal bankruptcy protection. Puerto Rico has been in a recession for over 10 years and poverty has reached 45%. During this time, 400,000 Puerto Ricans have left for the U.S. mainland. Joining me is Juan Gonzales, a reporter, author and columnist. He co-hosts the radio and TV program Democracy Now. He recently wrote an article for The Intercept called Puerto Rico’s $123 billion bankruptcy is the cost of U.S. colonialism. Welcome, Juan.
JUAN GONZALEZ: Thank you, Aaron. My pleasure to be here.
AARON MATE: As I’ve mentioned, the size of Puerto Rico’s debt is some $123 billion. Comparing that to the previous largest case of municipal bankruptcy Detroit. That case was $18 billion. Talk about the scale of this crisis and what this debt hearing that starts today could provide in terms of an answer?
JUAN GONZALEZ: This, frankly, represents the largest municipal bankruptcy in the history of the United States bond market. It involves not only about $74 billion that’s owed to creditors that what the various Puerto Rican governments have borrowed over more than 20 years now, but it also represents another $49 billion that the government of Puerto Rico owes to its government workers in retirement pensions.
The government, according to the Federal Oversight Board that was established last year, has about only $1.5 billion in its pension funds to pay $49 billion in debt. There’s no way that … In fact, within a year or two, the funds will be completely depleted, and the only way that anyone in either a retiree of the Puerto Rican government will be able to get any pensions is through direct payments out of the operating funds of the government.
This is a huge crisis. Hundreds of thousands of people are about to lose their retirement cushions, their pensions, as well as the bondholders are facing unprecedented loses. The oversight board appointed by the federal government says that even after a massive austerity program that they are supervising that’s going to involve great increases in taxes, increases in electrical rates, water and utility rates, and series of austerity measures, Puerto Rico still will only have about $8 billion over the next 10 years, when about $35 billion in debt becomes due. Basically, the bondholders are facing losing 75 cents on the dollar, even in the best case scenario for Puerto Rico, according to the federal government’s own oversight board.
AARON MATE: You touched on this, but I want to get into it a bit more. Just what impact the people of Puerto Rico face? I know that president Trump has signed a spending bill that would cut hundreds of millions from Medicaid. Plus, we’re talking about closing schools and slashing spending on all sorts of public services that you’ve mentioned. What are people on the island facing in terms of the impact to their daily lives?
JUAN GONZALEZ: It’s a great depression that doesn’t end. It’s now been 10 years now of constant contraction of the economy. As you’ve mentioned, 400,000 people have left the island. Puerto Ricans being U.S. citizens do not need any visas to leave and go to the United States, so they’ve been fleeing in large numbers. The result is the school age population has plummeted from over 600,000 several years ago to about 300,000 today. The government just announced the closing of more than 180 schools for this coming school year. This is on top of several hundreds that have been closed over the last few years.
As I said, just the general cost of living. The sales tax in Puerto Rico right now is 11,5%. It was increased last year from 7% to 11,5% and largely to pay certain groups of bondholders that have sales tax revenue bonds. The electrical rates are among the highest in the United States. Only Hawaii has higher electrical rates. The water and sewers are about to be privatized, but also the water and sewer rates have increased dramatically.
Most importantly, there are no jobs. Puerto Rico’s unemployment rate tipped a little bit in the first quarter. It’s now about 11,5%, but it’s been consistently between 12% and 15% unemployment. Official unemployment for more than a decade now. The labor force participation rate. The percentage of working age people that are actually working is only 46%, compared to about 62% in the United States. The island is the poorest of any territory of the United States, state or possession. One of the points I’m making in me Intercept column is that this is the price of colonialism. The bill has come due.
Puerto Rico has been the largest colony of the United States and the most lucrative colony now since 1898, and it’s been a steady source of super profits, first for sugar cane manufacturers in the early part of 20th century, and the second half of the 20th for textile manufactures and pharmaceuticals. It took advantage of its federal tax [inaudible 00:06:21] status. Over the last 20 years, of Wall Street financiers who have consistently promoted more debt to Puerto Rico as a means of [inaudible 00:06:32] the eventual day of reckoning, which has now come to fruition.
AARON MATE: Juan, when I think about the main counter narrative that I’ve heard to that, it’s two things. One is that, for years, Puerto Rico got these tax incentives for major corporations to be able to be located there, and when they were rolled back in the 90’s … because critics thought that they were unfair, gave Puerto Rico an unfair advantage. Puerto Rico then lost jobs and lost tax revenue to be able to pay for it. The second thing that I hear is that Puerto Rico also has simply spent more than it has. It has too big of a public system. How do you respond to that?
JUAN GONZALEZ: In terms of the tax breaks, the reality is that the colonial dependency of Puerto Rico has been a structural problem that the federal government has not sought to deal with. One example, for instance, is shipping laws. Every item that’s imported or exported out of Porto Rico, by federal law, must be on an American-made ship and with an American crew, and with American wages. While the rest of the world is trading on ships made in South Korea or Japan with Panamanian flags vessels with Greek and [inaudible 00:08:01] crews, and paying far more reduced wages for the transportation of their goods, Puerto Rico has been kept as a captive economy that, in essence, subsidized the maintenance of the U.S. merchant marine fleet.
That alone costs the island of Puerto Rico about $500 million a year in extra cost of their imported … obviously, it’s an island, they have to import everything. This is a decision that Congress made, not that the government of Puerto Rico made, that’s consistency asked to be taken out from the maritime shipping laws of the United States. Congress, and unfortunately, the American Labor movement doesn’t want to do that. The result has been that Puerto Ricans are made to pay extra duty to bring any goods in and out of the island.
There are other examples. The airline industry. The federal aviation authority decides exactly what flights can come in and out of Puerto Rico, preventing it from becoming its own Caribbean or Latin American hub for air transportation, and giving that special relationship to Miami, or to Atlanta. As a result, Puerto Rico is losing an enormous amount of [inaudible 00:09:19], again, because it is a dependent economy that does not control its own economic life. These are some examples of how Puerto Rico has been, basically, exploited, for the needs of American business and not for the needs of the Puerto Rican people.
AARON MATE: Juan, and speaking of which, of Puerto Rico not being able to control its own economic affairs, now it’s under the control of this fiscal control board, you mentioned, PROMESA, that was imposed not by the island, of course, but by Washington. As I understand it, is located in New York City. Can you talk about their oversight now of Puerto Rico’s financial affairs and what their agenda is? In fact, who is even on this board?
JUAN GONZALEZ: This financial control board is amazing. First of all, it is often compared to the District of Columbia Control Board that was imposed on the District of Columbia back in 1995. It’s a radically different type of board. For instance, back in 1995, Bill Clinton was president, Newt Gingrich was the Speaker of the House and it was a Republican controlled house. Clinton and Gingrich both agreed that District of Columbia was in severe financial problems and needed some kind of government involvement. They appointed a five-member board, all of whose members had to be residents of the District of Columbia. The president Clinton was given free hand to name all five members and to choose the chair.
This time around, when Puerto Rico feel into a much deeper crises than D.C. or [inaudible 00:11:00] Country or Detroit or any other municipalities, government institutions that have gone bankrupt over the last several decades. The Republicans refused to give president Obama a free hand to name the board, so that of the seven members of the Puerto Rico Oversight Board four have been essentially chosen by the Republic leaders of Congress and two by the Democratic leaders of Congress, one by president Obama and the Republican majority also got to choose the chair.
[inaudible 00:11:33] only a few of the members had to actually be residents of Puerto Rico. Most of them were residents of the United States. They meet in downtown Manhattan on a regular basis to decide the economic fate of an entire nation, of 3.4 million people. They have recently appointed a former economics minister from the Ukraine who was involved in the IMF financial rescue of the Ukraine to actually run the PROMESA Board in Puerto Rico. She’s getting paid $625,000 a year. Doesn’t speak a word in Spanish, knows nothing about Puerto Rico, but now she is, in essence, the czar of the economy of Puerto Rico.
It is astonishing that this kind of direct colonial imposition is going on today, when it was back in the 1950’s that the United States declared to the UN that Puerto Rico was no longer a colony. It was now a self-governing territory. There’s nothing self-governing about Puerto Rico today. Everything has to be decided by the Oversight Board, and by Washington through the oversight.
AARON MATE: Okay. That’s PROMESA, the Oversight Board. Let’s talk about the bondholders a bit more. There’s been a large PR campaign [inaudible 00:13:01] pressure Puerto Rico to pay its debt in full. The message we get when we see the ads that have out around it are that these bondholders and elderly pensioners who stand to lose their savings because this greedy government in Puerto Rico won’t pay up. As you pointed out earlier, Juan, a huge chunk of these bonds were bought up by Wall Street firms. Can you talk about that more?
JUAN GONZALEZ: Remember, there’s $74 billion in bonds, so there’s no doubt that they are retired, middle class people who have purchased Puerto Rico bonds over the years in groups like the Oppenheimer funds or the Templeton funds, because they were extremely lucrative. Puerto Rico bond was called a triple tax exempt, which means that they are not only exempt from your state taxes if you … For instance, if you buy a bond in New York and you’re a New York resident, they’re exempt from federal and New York state taxes, but if you are a resident of Arizona, and you buy New York bonds, you only get exemption from the federal taxes, not from state taxes.
Puerto Rico bonds are triple tax exempt throughout the United States. There was always mutual funds that saw the high returns of Puerto Rico bonds produce as an incentive to convince their investors to invest in specific funds that were based on Puerto Rico bonds. Those are a small portion of the bonds. There are a whole bunch of other bonds that you could only call them payday loans. They are total exploitation of Puerto Rico.
I gave an example, for instance, of one bond, a sales tax revenue bond that was [loaned 00:14:46] in 2007 for $98 million. $98 million. However, the bond did not mature for 47 years. Sorry, 46 years. During those 46 years, the government of Puerto Rico had to pay no principal, and amazingly, had to pay no interest. For 47 years, the interest kept accumulating onto the principal, so that by the time that bond comes due in 2053, Puerto Rico will owe $1 billion on an original loan of $98 million. This is highway robbery, this is payday loans Wall Street style and there are many of these in the Puerto Rico portfolio. In fact, the entire sales tax revenue bonds, which are about $17 billion, some people consider it to be illegal and that they should be voided completely, because they were an attempt to get around the limits on Puerto Rico’s ability to [float 00:15:54] bonds.
The second group of bondholders are general obligation bondholders. Some of them, they lent a total of about $3.5 billion in 2004. Most of those are vulture funds, hedge funds, that swooped in, offering bonds at 8% interest, and who are now the ones leading the charts to stop the financial control board from reducing the principal and the interest payments that are old.
You have a combination of payday loan-type bonds from Wall Street on which all these firms made huge amounts of fees, and then you have the vulture funds, the ones who attempted to bring Greece and Argentina to their knees, but also some of the same players involved in the … They’re the first in line with the most recent general obligation bonds, trying to battle in court to force Puerto Rico to pay them on the backs of the Puerto Rican people.
AARON MATE: Finally, Juan, taking it to this hearing that opened up today. Can this be part of the argument on Puerto Rico’s behalf? Can Puerto Rico point to the predatory nature of these bonds to say … as part of its argument for why it should be restructured in a favorable way? As the process goes forward, what are the key issues that you’re looking for and what developments do you expect out of it?
JUAN GONZALEZ: A key decision was already made by the judge Swaine, who was appointed by chief justice of the supreme court John Roberts to hear this case. She decided today that the “COFINA” bondholders, the sales tax bondholders and the general obligation bondholders, that their debts will be adjudicated together. The bond group did not want that. They wanted to maintain their separate groups, because they feel that they have separate legal arguments for why they should get paid first.
What the judge said today was that, “N, this is all one universal case, I’m gonna deal with them all together, uh, and y’all will be in the same basket when I have to decide how … what percentage of what’s owed to you you’ll get.” Today was a defeat for the general obligation bondholders and for the COFINA bondholders. It essentially upheld the decision of the Puerto Rico Oversight Board, because interestingly, what people don’t realize is that two years ago, the governor of Puerto Rico declared that this debt is not payable. There’s no way that Puerto Rico can pay its debt and maintain these basic services for its people.
Congress did not believe the governor. Congress appointed its own Oversight Board. Now, two years later, the Oversight Board has reached the same conclusion that the former governor of Puerto Rico reached, “This debt can not be paid. Two years have been wasted while the government got up to speed with the very same conclusions that the political leaders of Puerto Rico were saying back in 2015.
Now, we’ll have to see how the judge decides, whether the debt owed to pensioners who were not gambling by investing their money in risky bond adventures, but were just promised that they’ll get their pensions, who comes first? Who will have the least cut? Will it be the pensioners? Will it be the people of Puerto Rico and their services? Or will it be the bondholders?
AARON MATE: Juan Gonzales, reporter, columnist, author and co-host of the radio and TV program Democracy Now. Juan, thank you.
JUAN GONZALEZ: My pleasure.
AARON MATE: And thank you for joining us on The Real News.