Just a month after Governor Alejandro García Padilla said it will be impossible for Puerto Rico to climb out of its $72 billion in debt, the government this week missed a bond payment for the first time ever, compounding a political and economic crisis that analysts say is rooted in the island's true status as a "debt colony" of the United States.
The island paid just $628,000 of a $58 million that was due Monday to the Public Finance Corporation, where nearly 900,000 Puerto Ricans own the debt in small chunks via credit unions. Puerto Rico did, however, make the majority of its nearly $500 million other debt payments that were also due Monday.
James Henry, senior fellow for Columbia University's Center on Sustainable Investment and senior economic adviser for the Tax Justice Network, told Common Dreams: "They have selectively defaulted. They are defaulting on publicly-traded stuff and trying to negotiate private agreements with hedge funds. Hedge funds have a lot of clout in governments and are likely going behind the scenes to help influence who gets paid back. If Puerto Rico ever wants to borrow again they have to pay back these guys. That's the vulture approach."
As journalist Raquel Reichard put it on Wednesday, "Some have called the $58 million default a calculated effort, as Puerto Rico paid 'the big guys' with the legal power to sue, while it shortchanged the low-risk creditors in its own backyard."
While a territory of the United States, the island is excluded from federal bankruptcy protections, meaning that the government must negotiate individually with creditors. Given the island's poor credit, interest rates are likely to hike further.
"The story has roots in Puerto Rico’s economic relationship to the United States, which is primarily determined by the fact that it’s an unincorporated territory, or a colony, of the United States."
—Ed Morales, journalist
Some of Puerto Rico's hedge fund creditors recently recommended that the island tackle the debt crisis by imposing sweeping austerity measures, including severe slashes to workers' rights, healthcare, and public education. The island's government has already been imposing punishing cutbacks, including the dramatic defunding of the education system, prompting protests and strikes.
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Meanwhile, the country has suffered a mass exodus of doctors and is bracing for dramatic cuts to Medicare and Medicaid programs—thanks, in part, to federal funding shortfalls, in what amounts to a looming healthcare crisis. Sixty percent of the island's population depends on Medicare and Medicaid for healthcare. Further, the island grapples with a soaring poverty level of 45 percent, and unemployment over 13 percent—in a territory where residents are treated like second-class citizens of the United States, as they are unable to vote in presidential elections and not represented in Congress.
The debt crisis has prompted some to draw parallels between Puerto Rico and Greece and Detroit. However, as journalist Ed Morales recently pointed out in an interview with FAIR, there are key differences. Unlike Greece, Puerto Rico's banks are under the Federal Reserve. And unlike Detroit, Puerto Rico can not file for chapter nine bankruptcy.
"The story has roots in Puerto Rico’s economic relationship to the United States, which is primarily determined by the fact that it’s an unincorporated territory, or a colony, of the United States," said Morales. "The word 'colony' isn’t used that much, because of the actions that were taken by the United States government and elites in Puerto Rico to create this idea of a commonwealth, which allowed limited autonomous rule for Puerto Ricans."
Analyst Eric Draitser recently argued that the real culprits are the "Wall Street banks who have parasitically, and quite handsomely, profited from Puerto Rico’s financial straightjacket."
"Barclays, Morgan Stanley, Goldman Sachs, JP Morgan, Bank of America-Merrill Lynch, and many others rushed to underwrite massive loans in the form of bond purchases in order to then turn around and sell those bonds to hedge funds and other investors in the US and around the world, thereby raking in tremendous profits on the underwriting fees," wrote Draitser. "Essentially, Wall Street banks came in with enormous capital then transferred the risk on to other speculators, while making handsome profits as middlemen."
Last week, protesters carrying a vulture puppet staged a protest at the New York office of BlueMountain Capital Management, which owns debt from the Puerto Rico Electric Power Authority. "What they're talking about is going after schools, cutting teachers and other kinds of austerity measures in their voracious, rapacious desire to recoup all profits at any cost," declared Puerto Rican activist David Galarza.