Could Puerto Rico be 2016's Greece?
Puerto Rico, one of the most prominent United States territories, has been suffering through a deepening debt crisis. This dispute over the territory’s finances masks a struggle that has been lingering in American politics for years — for wealth and power. This economic battleground will attempt the balance the peculiarities of Puerto Rico’s official political status and Wall Street corporate greed.
Puerto Rico & Their Debt
The Puerto Rican debt crisis is an ongoing (as of early January 2016) financial crisis that is related directly to the debt (at around $70 billion) owed by the government of Puerto Rico. Their debt-to-GDP ratio has been recently calculated at about 68%, making it an incredibly unstable financial market, engulfing the country with poverty and horrendous revenues. This economic crisis has caused Puerto Rico’s government to adopt policies that will, in an idea circumstance, reduce costs and prices dramatically while increasing revenues in an attempt to spark economic growth. Mind you, this new stance on economics within the local government is made in an attempt to fund debt obligations instead of improving the failing infrastructure or improving the poverty rate. The government will be unable to do any of that before improving their shocking debts. Puerto Rico’s economy has been weak in recent years, aggravated entirely by social distrust and the unpleasantness surrounding corporate greed.
Back in August of 2015, Puerto Rico was forced to default on a $58 million bond payment to the Public Financing Corporation, a subsidiary of the Government Development Bank, while managing to meet other increasingly important financial obligations. The economic sectors of the Puerto Rican government have claimed that “the debt is not payable”, leading to a drop in Puerto Rican bonds and stocks throughout the later half of 2015. This only made things worse, adding onto the downgrade in economical stability received in 2014.
Causes of Puerto Rico’s Debt Crisis
Puerto Rico, a subject to the Commerce and Territorial Clause of the Constitution of the United States, is incredibly restricted on how it can engage with other nations. Suzerainty to the United States (as the United States is the powerful region that happens to be controlling the Puerto Rican foreign policies and economic platforms while allowing internal autonomy within the island) has been cited as one of the major causes of the crisis.
More than sixty percent (60%) of Puerto Rico’s population receives Medicaid services, which is incredibly low when compared to the actual states of America. While the State Mississippi would receive around $3.6 billion in Medicaid funding, Puerto Rico (as a territory) would only receive $373 million. This has led to the departure of underpaid workers within the Puerto Rican healthcare system, leading them to the mainland to leave the territory behind. This forces Puerto Rico to borrow money in order to keep its Americanized Medicaid system (called Mi Salud) afloat.
Puerto Rico, being a small, island nation, lacks important resources like coal, natural gas, and oil. A country that has to import all its necessary fuels to produce energy cannot stay afloat for long. Imported fossil fuels are paid through power purchase agreements, settling 30% of the country’s energy, causing an increase in private companies which are dependent entirely upon fossil fuels. To meet energy demands, Puerto Rico must import oil at a rate of 8.0 billion kWh, natural gas at 1,499,196 km3 per year, and a substantial amount of oil. As a result of this horrendous energy crisis, Puerto Ricans tend to pay 26 cents per kilowatt per hour of electricity, compared to an average of around 11 to 12 cents or less in the United States.
Interest income paid to owners of bonds issued by the government of Puerto Rico are exempt from all federal, state, and local taxes imposed by the United States government. This triple tax exemption allows Puerto Rican bonds to retain tax exemption regardless of where the bond holder resides in the United States, leading to immense corporate greed. Puerto Rico is merely a safehaven for the rich at this point when it comes to bonds.
Puerto Rico’s Department of Treasury is apparently incapable of doing its job, finding difficulty in collecting or reporting taxes. 44% of the Puerto Rico Sales and Use Tax (adding up to $900 million) did not match what taxpayers had reported via Form W-2’s. The Treasury itself did not collect payments owed to the department from taxpayers that submitted tax returns without their corresponding payments. This basically leads to an inefficient and unstable government branch, allowing citizens to take advantage by not paying full tax amounts. To make matters worse, the political class within Puerto Rico has proven to be highly stubborn when examining existent public policies. For example, even though the island’s geography is covered with many rivers, their government has opted to completely ignore hydroelectric power. Public policy has also opted not to pursue nuclear power either, leaving them forced to import oils, natural gasses, and coal from other countries at an increasingly high rate.
For the last 11 consecutive years, Puerto Rico has been experiencing an economic depression. In late 2005, the territory saw a series of deficits slam into their economic foundations. The expiration of section 936 that applied to Puerto Rico in the United States Internal Revenue Code soon expired afterwards, leaving them alone to fend for themselves. At least sixteen government deficits have occurred within the last sixteen years, further injuring the already broken economic backbone of the island.
Could we perhaps see an economic meltdown to similar calibers as we saw last year in Greece? Unable to file for bankruptcy, unable to receive bailout from the American government, and unable nullify or pay off their massive $70 billion debts, perhaps an economic meltdown could be in the foreseeable future.
- PRGDB “Financial Information and Operating Data Report to October 18, 2013” p. 142
- Caruso Cabrera (2014) “The island, a territory of the United States, is in the midst of a debt crisis.”
- Pub.L. 64–145 §3 “[…] all bonds issued by the government of Porto Rico, or by its authority, shall be exempt from taxation by the government of the United States, or by the government of Porto Rico or of any political or municipal subdivision thereof, or by any state, or by any county, municipality, or other municipal subdivision of any state or territory of the United States, or by the District of Columbia.”
- Sotomayor (2015) “If Puerto Rico’s ills were to be summarized concisely, the island is paying the price of applying rich-country policies on what is (to this day) an essentially poor society.”
- Sotomayor (2015) “Like Greece, Puerto Rico wants to restructure debt but not its economy.”
- “Financial Information and Operating Data Report to October 18, 2013” (PDF). Puerto Rico Government Development Bank. October 18, 2013.
- Puerto Rico Department of Education, Library and Information Services Program (21 September 2012). “Puerto Rico Five Year Plan 2013-2017” (PDF).
- Ismailidou, Ellie; Trianni, Francesca (12 March 2014). “The Next Financial Catastrophe You Haven’t Heard About Yet: Puerto Rico”. Time. Retrieved 12 March 2014.
- Mahler, Jonathan, and Nicholas Confessore, “Inside the Billion-Dollar Battle for Puerto Rico’s Future”, New York Times, December 19, 2015. Retrieved 2015-12-19.