Puerto Rico Debt Crisis

Jul 20, 2015

At the end of June, Puerto Rico’s governor Alejandro Garcia Padilla announced that Puerto Rico was bankrupt; that it could no longer meet its payments on a debt of 72 billion dollars, the largest public debt in the U.S. when compared to the population. Of course, since Puerto Rico is a “territory,” that is in reality, a colony of the U.S., it doesn’t even have the option that other state and local governments have to declare Chapter 9 bankruptcy and get a court to reduce the debt.

In some ways, the Puerto Rico debt crisis looks like the one that Detroit recently went through–but worse. Like Detroit, for many decades, Puerto Rico was a corporate mecca, one which attracted big manufacturers. In Puerto Rico’s case, what attracted the U.S. manufacturers was a huge tax break that Congress enacted in the mid-1970s, exempting them from all federal taxes. Textile and shoe manufacturers rushed into Puerto Rico to take advantage of this. The biggest pharmaceutical companies put in factories that produced their blockbuster drugs–paying the workers much, much less than they paid in the U.S. By the 1980s, Puerto Rico had become the most profitable single entity in the world for U.S. companies.

But when Congress reversed course in 1996, and began to phase out this federal tax exemption over the next decade, companies pulled much of their manufacturing out, leaving devastation and misery in their wake–just like Detroit was hit by the departure of many of the manufacturing plants.

But in Puerto Rico the supposed social safety net is even smaller and has more holes than in the U.S. The U.S. federal government funds Medicaid and Medicare programs at much lower levels for people in Puerto Rico than it does on the mainland–even though workers in Puerto Rico pay the same payroll taxes. The federal government also shortchanges Puerto Rico of block grants, as well as federal nutrition programs. And in Puerto Rico there is no Social Security Supplemental Income (SSI) benefits for the most indigent.

The lack of even these minimal benefits has created more insecurity, and has put more pressure on workers to accept lower wages ... when there are any jobs at all. Over the last decade of crisis, unemployment and poverty have been consistently higher in Puerto Rico than almost anywhere else in the U.S. Today, almost half the population lives below the poverty line. Is it any wonder that more than 50,000 Puerto Ricans every year are moving to the U.S. mainland?

After the manufacturers left, the big banks, hedge funds and other speculators smelled blood, and looked to profit from the debt and crisis.

For decades preceding the crisis, the Puerto Rican government had been building up debt, as it bent over backwards to subsidize the profits of the big companies that flocked to the small island. Once the companies left and unemployment grew, the size of the government debt began to grow faster. Pretty soon, the government was borrowing money to make its debt payments, and 40% of the Puerto Rico government’s budget was going to pay for its debt! By 2014, the banks rated Puerto Rico’s debt “junk,” which made it a target for speculators and hedge funds that quietly scooped it up at fire sale prices in hopes of making a financial killing.

Preparing to attack the Puerto Rican working class and poor even more, Governor Padilla brought in Steven W. Rhodes, the retired federal judge who oversaw Detroit’s bankruptcy case and famously did the banks’ bidding, imposing cuts in pension benefits to retired city workers. After Rhodes retired, he told Detroit newspapers that he was in favor of junking traditional pension benefits for municipal workers all together. Padilla also hired as financial advisors the same Citigroup team that had worked on the Detroit bankruptcy, and even used their offices on Park Avenue in New York City to meet with the big banks and hedge funds that are trying to squeeze ever more profits out of the small island.

Working people and poor didn’t cause the debt crisis in Puerto Rico. Just like in Detroit, not to speak of Greece, let the capitalists pay for their own crisis!