By Fulton Armstrong
Puerto Rico’s debt and budget crises – worsened by the legislature’s rejection last week of the governor’s proposed fiscal reforms – threatens to plunge the island into a deeper, longer-term depression and is already causing tensions with Washington. The government and state-run corporations are $73 billion in debt, with little prospect of paying it off. The Puerto Rican Electric Power Authority (PREPA) alone owes investors, mostly based on Wall Street, about $9 billion. Last year, the government restructured about $19 billion of PREPA, the water company, and the highway administration’s debt – giving itself barely a year’s breathing room. The inability to make good has caused internal political tensions and thrust the government into the danger of defaulting, which would shut off access to much-needed credit for potentially years to come. Hedge funds and others have been buying Puerto Rican paper at deeply discounted rates.
No solution seems possible to make good on such monstrous debt. Governor García Padilla last year took steps to rein in spending and dramatically reduce the deficit – from $2.2 billion to $200 million a year. Government personnel have declined by 16,000 positions without disruptive layoffs. But such measures have barely made a dent in the $73 billion in outstanding liability. García Padilla has been reluctant to fight PREPA over its inefficient management structure, force it to shift away from expensive hydrocarbons (which account for 98 of electricity production), and adopt renewable energy sources. The legislature last week killed the centerpiece of his budget reform – a 16 percent value-added tax – and further complicated efforts to persuade lenders that the debt will be paid. A broader economic slowdown over the past decade, with even tourism registering declines, has been a key factor. The Governor’s biggest hope at this time seems to be legislation in Washington, introduced by Puerto Rico’s non-voting member in the U.S. House of Representatives, that would allow the corporations to declare Chapter 9 bankruptcy – which Puerto Rico (unlike the 50 states) is forbidden to do under current federal law.
The economic crisis is triggering a political crisis on the island and potentially in relations with Washington. As Argentina’s failure to make good on its debts has demonstrated, U.S. hedge funds have extraordinary clout and will use it to block anything that lets Puerto Rico off the hook, reducing the chances that Representative Pedro Pierluisi’s bill will pass to practically nil. The United States may press the island harder to reform its inefficient corporations, but it will ultimately have no option but to watch the crisis deepen. The situation will give greater urgency to another referendum on Puerto Rico’s status, which the Governor said will take place in 2016, with two contradictory trends at play. While many Puerto Ricans undoubtedly resent aspects of Washington’s attitudes toward the island, polls show no change in single-digit support for independence. Most Boricuas, if nothing else, value their U.S. citizenship and the ability to move stateside if conditions on the island get much worse. Even if the debt crisis frays relations with Washington, inertia argues for no redefinition of the relationship. There is little indication that Washington will clarify the island’s status unless Puerto Ricans become a factor in Florida during the 2016 presidential campaign.
May 7, 2015