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Puerto Rico Blues
Puerto Rico’s Rolling Catastrophe

Puerto Rico bondholders are in for an unpleasant start to 2016 as the island announces that it will default on some of its debt payments on New Year’s Day. The NYT

In a briefing for journalists, Gov. Alejandro García Padilla said only some of the payments would be halted immediately. They include $35.9 million due to holders of bonds issued by its Infrastructure Financing Authority, and $1.4 million due to holders of its Public Finance Corporation’s bonds.

In a stark example of the financial version of musical chairs that has been playing out on the island in recent months, the government will divert a total of $174 million from lower-grade bonds to pay holders of the legally protected general obligation bonds. That diversion, known as a “clawback,” technically amounts to a default even though some of those creditors will not see a difference in their payments on Jan. 1.

Puerto Rico was already in default, and no one seems to have expected that it would make this payment in its entirety. But the official announcement underscores the fact that there is no end in sight for the island’s crisis. The appetite in Congress for a bailout or bankruptcy protection appears to be minimal, and it seems likely to stay that way for the near future unless and until Puerto Rico’s woes start to hit the mainland in a major way—a prospect that is not inconceivable, but which advocates of a no-strings-attached bailout have every incentive to exaggerate. So in the short term, the island will probably be forced to continue grinding it out on the backs of its own taxpayers.

In the medium term, as we have said before, there is a role for Washington in bringing Puerto Rico’s crisis under control. The guiding principle of U.S. government involvement should be “relief for reform“—that is, Puerto Rico should be eligible for meaningful assistance in servicing its debts if and only if it can make profound structural changes to the decrepit blue model governance system that landed it in this mess. Finally, in the long term, the island may face an even more radical choice: either remain a colony or pursue either outright independence (where it could rise or fall on its own in the debt markets), or, after top-to-bottom reforms, statehood (which would relieve it of various hurdles to solvency, and allow for state and local bankruptcies). Neither of those second two options would be easy, but the depth of the current crisis shows that the status quo has fundamentally failed.

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  • Kevin

    If they don’t want to reform the status quo is probably the preferred option – eventually someone in DC will hand them a pile of cash due to white guilt and/or the island just being an international embarrassment…

    The next time the Democrats control DC they could ram through statehood, then log roll votes in Congress and President for Democrats in return for perpetual bailouts.

  • Andrew Allison

    No, there is no argument for Washington intervention. The purchasers of the PR bonds did so for one reason only, the net return due to their tax-free status. There was, and is, a reason for the high yields on offer (risk) and no earthly reason for the taxpayer to bail out the bondholders because the risk turned out to be real.

  • Pete

    The average Puerto Rician may be ill-educated but they are not totally stupid. Independence for the island who mean Daddy Yankee would no longer be supporting them which would drop P.R. to the level of, not necessarily Haiti, but surely of the Dominican Republic.

    Regarding statehood; even if Puerto Ricians wanted it, which up to now they haven’t, that idea would never fly in the U.S., not withstanding the Democrat Party’s desire for two more permanent senators.

    • Hominid

      Two more Dem senators, a handful of Reps, and a whole bunch of stupid, unAmerican, Dem voters dependent on gov welfare, drugs, and crime.

      • jhp151

        It would really take a corresponding new red state to make PR a new state.

    • https://twitter.com/ulisesjorge Ulises Jorge Bidó

      “…would drop P.R. to the level of, not necessarily Haiti, but surely of the Dominican Republic”

      Have you been paying attention to the Dominican Republic lately?

      “The Dominican Republic, just 90 miles from Puerto Rico’s west coast, during the past 40 years, went from languishing in abject poverty to a thriving economy. There was a time when the Dominican Republic had a mere 3,000 hotel rooms compared with Puerto Rico’s 7,000 hotel rooms. Today, Puerto Rico only has about 15,000 hotel rooms. In the 1960s, unemployment in the Dominican Republic was more than 20% and the economy had negative growth for more than a decade.

      Fast-forward to 2015 and the tables have turned—the Dominican Republic, like Ireland, has a strong and growing economy. They have capitalized on their God-given attributes to grow tourism and increased the number of hotel rooms to more than 70,000, and more are in construction. Importantly, the Dominican Republic has two transshipment ports, one of which, located in Caucedo, is equipped to receive post-Panamax ships. The Dominican government realized long ago that it stood to capitalize on the traffic of post-Panamax ships that would be sailing the maritime highway of Mona Passage en route through the Panama Canal, connecting the Atlantic and Pacific oceans.

      How ironic that two nations that once looked to Puerto Rico in the 1950s and 1960s as an example of economic development, have now passed us by, by far.

      The quote is from Caribbean Business, based in Puerto Rico.

      • Pete

        Be that as it may, is it your contention that as of this moment the Dominican Republic has a higher standard living then does Puerto rico?

        • https://twitter.com/ulisesjorge Ulises Jorge Bidó

          No, but what you said is that if Puerto Rico would become independent it would fall to the level of the Dominican Republic. That is indeed the conventional wisdom, so lots of people in the island actually believe as you do. Right now GDP per capita and the Human Development Index (HDI) in Puerto Rico is higher than in the Dominican Republic.

          But here’s the thing: less than half the adult population in Puerto Rico is employed or looking for a job and of those employed about a third work for the government. A large proportion of those not working are on the welfare rolls; so yes, somebody living on welfare in Puerto Rico might be in a better shape economically than someone working for $300 in the D.R. private sector according to how those things are measured internationally. But which one is contributing more to its country economy and the general well-being?

          It is not really and apples to apples comparison and that’s why I responded to your message. I live in the mainland U.S. right now, but I’m originally from the Dominican Republic and lived in Puerto Rico for over 20 years. I saw the rapid deterioration of the economy in P.R. and in 2008 I quit a good paying job, sold my apartment and moved to the mainland and joined the hundred of thousands of middle class professionals and small business owners that have been leaving Puerto Rico in the last 10 years.

          So what is left in Puerto Rico? Not much to build an economy, specially one as indebted as Puerto Rico’s. The Dominican Republic as you saw in my quote from Caribbean Business is actually growing and most important they are doing it with a combination of foreign investment, local natural resources, tourism, agriculture and manufacturing. They have a more diversified economy (as an aside, that transshipment port mentioned in the article I quoted? It was proposed for Puerto Rico first, in the southern city of Ponce…but political infighting among the two dominant factions in Puerto Rico scared investors off).

          That debt is a huge structural impediment for Puerto Rico and a lack of political will to make the hard choices to change it. The Dominican Republic is in a different situation and if they keep it up in five to ten years they could actually be in a better shape (as measured by international organizations) as Puerto Rico is.

          • Pete

            In my opinion, the greatest impediment to Puerto Rico reforming itself so as to allow real development is the island’s easy access to America’s welfare state.

            The welfare transfer that PR receives is a blessing in disguise. Without a doubt, it raises the commonwealth’s standard of living but at the same time it lowers the incentive for the boricuas to get off their a** and to work, …. and by work I don’t mean government employment..

            If I had my druthers, Puerto Rico would be sent its way and given its independence.

          • https://twitter.com/ulisesjorge Ulises Jorge Bidó

            “In my opinion, the greatest impediment to Puerto Rico reforming itself so as to allow real development is the island’s easy access to America’s welfare state.

            The welfare transfer that PR receives is a blessing in disguise. Without a doubt, it raises the commonwealth’s standard of living but at the same time it lowers the incentive for the boricuas to get off their a** and to work…”

            You’re onto something there because this is an argument that Puerto Ricans themselves make; in fact, in multiple conversations I had with pro-statehood and status-quo advocates about why they wouldn’t support independence for Puerto Rico the main argument they made was about the economic dependence of the island.

            I thought that was the main reason as to why they didn’t want independence, but then I remember that never in their history under the Spanish did they make a serious attempt at independence. The Lares uprising lasted a day or two and that was it, even though they were poor. Even during the first decades of U.S. administration the island was mired in poverty, which leads me to believe that they really don’t want independence. But your solution is probably what they need…a measure of tough-love, swim or sink…

  • JeffreyL

    There is no bankruptcy for States. States are sovereign entities in our federal structure of government. So if it were to elect statehood, there would be no bankruptcy help forthcoming, actually less so as Congress has the power to grant the ability of protectorates to be included in US Federal Bankruptcy jurisdiction, whereas congress has no such authority if Puerto Rico was a state

    • Fifty Ville

      If there’s even a hint of bankruptcy help for Puerto Rico, watch Illinois and California jump into action to shoulder aside the little island and grab such help for themselves.

  • blackdog

    It is perplexing, watching the collapse of the welfare state in Europe, Puerto Rico, American cities and states, that people don’t change their voting habits. One would think the dignity of employment, opportunity to better oneself, independence and freedom to act would be valued more highly than empty promises from corrupt parasitic career ‘public servants’. Perhaps people employed by government and those living off government handouts should not be permitted to vote.

  • SDN

    “pursue either outright independence (where it could rise or fall on its own in the debt markets)”

    Or, as an independent nation, find out how much China, Russia, or Iran would pay for naval and air basing rights.

  • Bill Francis

    The people of Puerto Rico need to take a hard look in the mirror to see who is at fault here. The People voted and elected the fools who do what idiots do: promise the world. Remember this slogan: If it sounds too good to be true it’s probably too good to be true. When you bet on the guy who is promising a freebie you risk everything.

    Remember the screaming about the Navy bombing range? Too much noise. Not safe. They when the Navy left the “People” learned they lost all the good paying jobs and much of their economy.

    You asked for it. Now, pay the piper. No bailout from the feds, period.

  • Misanthrope

    Does anyone seriously believe the Feds would force PR to follow through on “reform”?

  • Fat_Man

    Contrary to your last graf, there is no bankruptcy jurisdiction for States.

    The objections to a bankruptcy procedure for Puerto Rico should be less. Bankruptcy exists to protect creditors. The discharge of debtors is an incentive for them to be forthcoming, not the goal of bankruptcy.

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