Magazine article Monthly Review

Puerto Rico: The Crisis Is about Colonialism, Not Debt

Magazine article Monthly Review

Puerto Rico: The Crisis Is about Colonialism, Not Debt

Article excerpt

Tourists are fascinated by the heavy blue cobblestones that pave the streets of Old San Juan. Why they are there is as good an explanation as any for Puerto Rico's current crisis. In the days of Spanish colonialism, they were ballast to keep the ships crossing the Atlantic from tossing about and blowing over. The ships came empty, and left for Spain full of gold, silver, and other riches stolen from the indigenous Tainos. The ballast left behind was used to pave the streets.

Puerto Rico has been sacked by colonial powers for half a millennium. Is it any wonder it is in dire straits? Today, it is $73 billion in debt. As a point of comparison: Greece recently asked for about $82 billion from the European Union. The German finance minister thought it was funny when he proposed to U.S. Treasury Secretary Jack Lew that the Eurozone exchange Greece for Puerto Rico. This is not funny; it is not even a good analogy. Neither the Germans nor the Eurozone have the power to "trade Greece" to anyone; its citizens can tell their prime minister what they think about EU debt proposals. Of course, they have to weigh their choice against the threat of being kicked out of the Eurozone.1

Puerto Rico has no such choice. Under the "Territorial Clause" (Article IV, section 3) of the U.S. Constitution, Congress could sell or trade Puerto Rico to whomever it wanted, without ever looking south to see what Puerto Ricans thought about it. And, although it paid Anne O. Krueger (first deputy managing director of the IMF, from 2001 to 2006) and two other former IMF officials $400,000 to make recommendations about Puerto Rico's economic crisis, Puerto Rico itself-as a "territory" of the United States-has no access to the World Bank, the IMF, or regional financing.2

Governor Alejandro Garcia Padilla gave early warning that, as the Kreuger report concludes, the debt can neither be paid when due nor serviced. Puerto Rico cannot continue to finance the debt with additional loans at higher interest rates. The report also found that the debt has been growing faster than the economy, which has been shrinking for almost a decade. And much of the debt itself is currently due on bonds used to finance-the debt.3

On August 1, Puerto Rico failed to make a $58 million payment on "moral obligation" bonds issued by the Corporation for Public Financing. The indenture of these bonds has no enforceability clause, so bondholders have no straightforward means of enforcing payment. They are "guaranteed" by the moral obligation to pay from funds which must be-but were not-appropriated by Puerto Rico's cookie-cutter imitation of the U.S. Congress.

The reason? The well went dry. "Nonsense," say the bond holders. "You are still providing free university education to every qualifying student, and paying operating expenses. That money is owed to us." Puerto Rico's Secretary of Justice insists this is not a default, but a postponement of payment until some rational solution can be negotiated with creditors. It is, of course, a question of priority. The government is still paying salaries to keep the schools and hospitals open, the buses and ferries operating. But there is a wrinkle: Article VI, §8 of Puerto Rico's Constitution (which was subject to modification and approval by Congress) makes payment of interest and amortization of the debt the first priority.

Puerto Rico is essentially running on bonds held by U.S.-based banks and corporations, although pension funds and mutual fund investors attracted by triple-exempt, high-yield bonds are also affected.4 Oppenheimer Funds and Franklin Templeton Advisers lead the way. And then there are the hedge and vulture funds (Blue Mountain Capital, Stone Lion Capital, Aurelius Capital, as well as several holding junk bonds from Puerto Rico, Greece, and Argentina). Together, they hold close to half of the debt.5

Underwriters include Barclay's PLC, RBC Capital Markets, Morgan Stanley, J.P. Morgan, and the Bank of America-Merrill Lynch. …

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