As Vulture Funds Circle, Puerto Rico Set to Default on Debt
'There are no budget cuts or tax hikes that can solve this crisis'
Puerto Rico says it will default on its debt Monday, escalating the economic crisis on the island that sees no sign of stopping in the face of exploitative hedge funds.
The commonwealth is expected to miss its upcoming $422 million bond payment for its Government Development Bank. The default comes after U.S. Congress failed to act to help the island territory last week, in a decision that followed a concerted lobbying push by hedge funds angling to profit off its debt crisis.
As International Business Times reports:
Over the last few years, hedge funds and mutual funds have bought up large tranches of Puerto Rico’s bonds at cut-rate prices, hoping the island will pay back its debts in full, thereby giving those financial interests a big payout. That gamble, however, has relied in part on the bet that the island will make draconian cuts to social services and worker pensions and use the savings to pay back 100 cents on the dollar to its Wall Street creditors — a bet, in other words, that Congress will prevent the island from simply erasing some of its debt through the kind of bankruptcy protections that are afforded U.S. cities.
To that end, federal lobbying records show that major banks, bond insurers and hedge funds spent millions last year to try to shape bankruptcy proposals for the island. Two so-called dark money groups linked to the billionaire Koch brothers and Republican strategist Karl Rove are also working to influence the debate over Puerto Rico’s debt.
"Faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice," Puerto Rico Governor Alejandro Garcia Padilla said during a televised speech on Sunday. "I decided that essential services for the 3.5 million American citizens in Puerto Rico came first."
The Sunlight Foundation reported earlier this month that one of the dark-money groups behind the lobbying push, the Center for Individual Freedom (CFIF), purchased at least $200,000 in ads around Washington, D.C. to influence lawmakers away from passing legislation that would ease the island's debt burden. The Koch-backed American Future Fund also placed ads with Politico and the Wall Street Journal that attacked Garcia Padilla.
Congress continued to drag its feet on legislation that could have eased some of Puerto Rico's debt burden despite efforts by economic justice groups like Jubilee USA, which organized a call-in day of action urging constituents to ask their representatives in the House to pass the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which would have allowed the commonwealth to restructure its debt.
"There are no budget cuts or tax hikes that can solve this crisis," said Jubilee USA executive director Eric LeCompte. "Debt restructuring is a necessity before we can see any economic growth."
The $422 million is only a small chunk of the island's $70 billion debt burden. Its human impact has been enormous, fueling a poverty rate of nearly 45 percent, tens of thousands of public employee layoffs, tax hikes, and widespread school closures. As a result, Puerto Rico is seeing its largest exodus in 50 years, its population dropping nine percent from 2000 to 2015.
Puerto Rico's next payment is due in July. As LeCompte said on Monday, "Congress could have prevented the May default. With even greater consequences around a July default, Congress needs to act quickly."
"Puerto Rico needs to bring its debt back to payable levels," he said. "Any solution must respect the rights of the creditors, Puerto Rico's government and the needs of the island's people. We remain concerned how this fiscal crisis is impacting the poor and vulnerable. 57 percent of Puerto Rico's kids live in poverty. The most important cost to be concerned about is the human cost of this crisis."