In late June, as the European bankers sneered at the crisis in Greece, Germany’s Finance Minister Wolfgang Schauble joked at the Bundesbank Conference in Frankfurt: “We will take Puerto Rico into the Eurozone if the United States takes Greece into the dollar union.” The bankers in the room laughed. It was as if they were adults talking about their wayward children.
Greece’s debt ratio is 175 per cent to its gross domestic product (GDP). Puerto Rico, half the size of Greece, is carrying a debt ratio of 150 per cent of its GDP. Neither has an easy way forward. Greece—sitting on a major debt crisis—had few alternatives before it. Surrender seemed the likely option, despite the popular Greek referendum against such an outcome. It is what the Syriza government decided upon. Puerto Rico has an easier institutional exit. It could declare bankruptcy and then protect itself from its creditors. This is an option that is not available to Greece. Puerto Rico, as a U.S. territory, has the advantages of its location. That is what Schauble’s quip played upon. It was a weak joke. The only reason Puerto Rico will be saved from the humiliation visited upon the Greeks is its attachment to the U.S. Puerto Rico will be bailed out by U.S. taxpayers.
On June 28, Governor Alejandro Garcia Padilla, a youthful politician from the Popular Democratic Party, said that the island could not pay back $72 billion of its debt. Struck by the financial crisis of 2007, Puerto Rico survived by unsustainable borrowing through the issuance of bonds. Banks seemed confident that if any problems arose, the U.S. Treasury would stand as surety for the island. One structural problem for the island was the end, in 2006, of tax breaks to U.S. firms that located their industries in Puerto Rico. These tax breaks had encouraged the development of a pharmaceutical industry, which has now suffered from the lack of such advantages. Garcia Padilla travelled to Spain to drum up support for this sector, but found little sympathy. Spain has its own problems. Despite these structural problems, Puerto Rican bonds continued to find a market amongst New York’s hedge funds. The main reason is that there is no tax at the federal, state or local level for Puerto Rican bonds. This loophole drew in banks, which would have known that Puerto Rico simply did not have the wherewithal to service the bonds.
Social problems
Anybody who can read a government report would have been able to see that Puerto Rico suffers from some crucial social problems. Its poverty rate is 41 per cent, which is almost three times that of the overall U.S. poverty rate. The per capita income is $19,000, which is half that of the mainland. As a result of the economic crisis, 48,000 Puerto Ricans left the island for the mainland—cutting the tax base and draining the island of skilled workers. Garcia Padilla’s form of liberalism was incapable of grasping the problem. His political imagination went directly into austerity. He sliced government pensions and raised gasoline taxes, both of which put pressure on consumption and prices. Two-thirds of the island’s people now disapprove of him and his administration. But they can do little. There is little credible opposition.
Garcia Padilla, who said that the problem was not about politics but mathematics, took his lessons from an International Monetary Fund (IMF) report authored by the well-regarded neoliberal economists Anne Krueger, Ranjit Teja and Andrew Wolfe. The Krueger Report calls for cutbacks against the minimum wage and year-end bonuses to workers, the desiccation of public sector payrolls, and privatisation of the Puerto Rico Electric Power Authority. It provides the intellectual case for Garcia Padilla’s neoliberal policy agenda. If enacted, these policies would hasten Puerto Rico into a much more perilous state than now, and certainly along the same path taken by Greece from 2010 onwards. An old IMF chestnut remains crucial to the report: “The debt crisis is not just a fiscal one but also reflects structural problems that have held back growth—both need to be tackled together.” In other words, Puerto Rico does not, according to the IMF, suffer merely from a financial problem of paying its creditors. There is no confidence that if, for instance, the pharmaceutical industry revived, Puerto Rico could have the surplus to take care of its problem. Rather, the problems, the IMF argues, are rooted in the very structure of Puerto Rico’s economy, namely in the minimum wages, the pensions, the tax system, and so on. These pillars of social life in Puerto Rico need to be brought down in order to please the bankers.
But Puerto Rico has one important advantage —namely, its connection to the U.S. The Krueger Report and Garcia Padilla recognise this fact. Puerto Rico is currently excluded from the protections of Chapter 9 of the U.S. Bankruptcy Code. In other words, U.S. municipalities and States can seek legal protection against their creditors to set up a payment schedule that protects their basic assets and their bond ratings. Both Krueger and Garcia Padilla want the U.S. Congress to remove the exclusion of Puerto Rico from that Act. It is likely that this will be done by the U.S. Congress, which sees such integration as a further nail in the coffin for Puerto Rico’s autonomy.
The second policy that the Kruger Report points towards is an archaic law—the Jones Act of 1920—that prevents foreign ships from unloading goods at two U.S. ports. What this means is that a ship that brings goods to Puerto Rico must first go to a mainland port (where the market is larger) and then goods are transhipped to the island. This raises the cost of goods. From sugar to bread to gasoline, consumer goods cost far more on the island than on the mainland. An end to the Jones Act for Puerto Rico would ease up prices. It is not clear if the U.S. Congress will do so.
Garcia Padilla’s ‘reforms’
One of Garcia Padilla’s early “reforms” was to slice government funding of the University of Puerto Rico. Students across the island went on strike in May against the proposal. Their militancy was shut down by swift police action. The media on the mainland largely ignored these struggles, as they did the fights against the privatisation of the power sector.
Such struggles and older social democratic forces in the island pushed Garcia Padilla to refuse any change in the minimum wage. The Governor also called for a moratorium on debt servicing. He did not want to see Puerto Rico’s current account being siphoned off by its creditors and to see the society cannibalised to honour the debts. This is precisely what happened to Greece, where only 11 per cent of the credit that came in since 2010 went to the Greek people themselves (the rest went to the creditors).
Garcia Padilla continues to use the word “sacrifice” in his speeches. The question asked by Puerto Ricans is why such a word is only used against ordinary people and never against the bankers. This is the same discussion that took place in Greece. By tax policy and by cuts in social spending, the Garcia Padilla administration continues to press the Puerto Rican people to make sacrifices. This is what drives more and more people to move to the U.S., where they can go without visas (because of the island’s status as a U.S. territory). Sacrifices will not turn around Puerto Rico’s problems. Other options are not on the table, largely because the political landscape on the island is bleak.
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