Puerto Rico’s ongoing debt crisis is on an unprecedented downward spiral, and no one can say how much farther out of control things will get. The American territory’s government is broke thanks to years of runaway government spending and poor budget management.
The Puerto Rican government recently filed for Title III bankruptcy, under legislation that was passed by Congress nearly a year ago. Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) and created a seven-person Oversight Board tasked with developing a Fiscal Plan for Puerto Rico.
But Title III could take years to be resolved in court and is highly likely to delay any chance at real economic recovery that the island might have. The bankruptcy process will give Puerto Rico the legal ability to impose severe discounts on creditor recoveries, but in the long run will almost certainly hinder the commonwealth by denying it full access to the credit markets. There are 22 lawsuits and counting that have already been filed by several of the island’s creditors.
The more desirable outcome would be for Puerto Rico to develop a complete, common-sense and transparent reformation plan that, thanks to previous policy decisions, can only be attained through comprehensive negotiations with creditors. That would be one step toward a more economically sound future — one that sees real economic growth and progress.
Attorney Andrew Rosenberg, who represents some of Puerto Rico’s bondholders, paints a grim picture. The Financial Times quoted him saying: “With that bankruptcy now started, the governor has forfeited all power over the restructuring, and the economy of Puerto Rico will be put on hold for years.”
The mere fear that Puerto Rico’s future is no longer in the hands of its people, but in the hands of bankruptcy lawyers who are not accountable to Puerto Ricans, is itself enough of an obstacle to what should be the overarching goal: long-term financial health for Puerto Rico and its roughly 3-1/2 million American citizens.
The economic crisis has taken its toll on Puerto Rican families. In January, the government demanded a set of drastic measures, including large cuts to pensions, education and health spending, leading to the kinds of declines in economic activity that Venezuela is currently experiencing. Earlier this month, those cuts were passed when the government announced its plans to close more than 180 public schools across the island, affecting over 27,000 students.
People are fleeing Puerto Rico because of the lower standard brought on by years of mismanagement and policies that grow the size and scope of government and keep the economy from growing.
Most estimates put the number of Puerto Ricans that have fled over the last ten years at about 350,000. Without real economic recovery, this is a trend that is highly likely to continue, and will in turn be an obstacle to achieving that recovery.
This economic disaster in Puerto Rico is starting to be compared to the Greek crisis that started in late 2009. One important comparison might already in order: Greece lost its control, leaving its leaders with no capacity to make decisions on behalf of the people when it came to resolving the country’s debt crisis.
Ultimately this may be a wake-up call for Puerto Ricans, as the debate over its current territorial status, created by the U.S. in the mid-20th century, is set to turn another page with the pending status referendum coming up on June 11.
The combination of an economic mess and a political mud fight is the worst situation for Puerto Rico. What happens next will not only determine the future of the economy, but it might also bring political changes that for better or worse will rewrite the future of the mainland’s relationship with the commonwealth.
- Lopez is president of the Hispanic Leadership Fund, an advocacy organization dedicated to promoting liberty, opportunity and prosperity for all Americans.
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