Tag Archives: Puerto Rico

Puerto Rico: Crisis Point

In a bid to sure up their island’s dire fiscal situation and address its $72 billion in outstanding public debt, Puerto Rican lawmakers narrowly passed a bill on Tuesday to significantly raise taxes on the territory’s inhabitants. The controversial legislation specifically increases Puerto Rico’s sales tax from 7 to 11.5 percent, the highest in the United States, and introduces a new 4 percent tax on professional services. If the bill is ultimately signed by Puerto Rico’s governor Alejandro Garcia Padilla, which seems likely given his avowed pro-austerity views, then the tax hikes will be implemented within the year.

Tuesday’s news comes after an announcement from San Juan that the government will be closing nearly 100 schools and 20 public agencies in the near future in order to save money.

Puerto Rico is in the midst of a crippling 8 year recession, characterized by devastating unemployment and poverty levels and unprecedented population flight. Critics of Tuesday’s bill decried the fact that the burden of the San Juan’s latest austerity scheme falls squarely on Puerto Rican consumers; they argue that the new taxes will seriously undermine already lagging economic demand on the island and ultimately deepen and prolong Puerto Rico’s longstanding recession, making it impossible for the territory to get out from under its smothering debt in the longterm.

Proponents of the legislation, on the other hand, say that such tax increases are desperately needed in order to stave off a government shutdown in the short-term. Foreign creditors, whose ongoing financing of the island’s government has become indispensable, with vested interests in Puerto Rico’s future solvency have long threatened to pull out of the U.S. territory in the absence of substantive austerity measures there. Policy makers in San Juan are hoping that the $1.2 billion in revenue that the new taxation is expected to yield will calm creditors abroad and attract new investors on the international bond market.

While credit rating agencies’ repeated downgrades of Puerto Rican treasury bonds have led many to reconsider their fledgling investments in the territory, one institution is actually seemingly eager to go all in on the struggling island.

You might be wondering who in their right mind could possibly want to purchase chunks of Puerto Rico’s behemoth and seemingly insurmountable debt. Why it’s our old friends over at Goldman Sachs; you know, the infamously predatory Wall Street banking conglomerate, and Federal Reserve junkie, that Matt Taibbi once hilariously, and poignantly, dubbed “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Well, according to recent article from Bloomberg Business, Goldman is currently gobbling up Puerto Rican bonds at breakneck speed, even as other investors flee for the hills. That a firm as historically and continually immoral and incompetent as Goldman Sachs is tripping over itself to buy up junkish Puerto Rican bonds should unnerve everyone. There’s a scam afoot here ladies and gentlemen, and you and I are the marks… again.

We’ve seen this movie before, and we know how it ends. If past is pretext, and -considering the U.S. government’s failure to break up Wall Street’s seemingly omnipotent “Too Big To Fail” banking cartels and fundamentally reform how it regulates and subsidizes such firms in the wake of the 2008 crash- it almost certainly is, then American taxpayers will get stuck bailing out Puerto Rico’s bondholders if and when the island eventually goes belly up fiscally. But by that point, the sharks at Goldman will have presumably already swam off into the Caribbean sunset, having sold off most of their toxic Puerto Rican assets to unwitting investors and simultaneously made lucratively risky and cynical bets against those same sales long before the island’s financial collapse. Wall Street will have transformed another crisis into a golden opportunity for itself, and the dismantling of Puerto Rican society will continue apace.

  

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Tensions Flare in Puerto Rico’s Debt Battle

Disgruntled students from the University of Puerto Rico took to the streets of San Juan last Wednesday to protest a government plan to slash their school’s funding by some $166 million. The spending cuts formed part of a $1.5 billion austerity program that the island’s governor, Alejandro García Padilla, had hoped to implement in order to put a dent in the territory’s whooping $72 billion debt and calm nervous foreign investors with a stake in Puerto Rico’s financial solvency.

Heated confrontations between the demonstrators and police, as well as a bomb scare at the governor’s mansion, prompted García Padilla to abandon some of the controversial cuts by Thursday. He subsequently met with Puerto Rican legislators and drew up a revised, more revenue-centered, budgetary plan in an effort to salvage the larger austerity package. The new plan increases the island’s sales tax by 4.5 percent and introduces a new value added tax of 4 percent on goods and services that were previously exempted from such dues. Tax increases aside, the replacement proposal includes $500 million in painful public spending cuts as well. Whether the government will be able to implement the austerity measures in the face of almost certain public backlash remains to be seen.

Puerto Rico’s ongoing debt crisis has already led to 150 school closings in the past five years. According to the government’s own estimates, 600 schools may face closure in the next five years if the territory’s fiscal situation doesn’t improve.

Puerto Rico’s Education Secretary, Rafael Román, pointed to the mass exodus of tens of thousands of Puerto Ricans in recent years as a major factor in the government’s decision to move ahead with school closings. Puerto Rico’s 3.5 million population has shrunk by a staggering 7 percent over the last decade and is projected to contract by a further 0.6 percent this year alone. 

A significant portion of the people leaving Puerto Rico are doing so in reaction to the island’s deep and longstanding recession. They’re fleeing the Puerto Rico’s 44 percent poverty rate and its 14 percent unemployment rate (the latter figure, which is double the U.S. mainland’s rate, is likely vastly understated given its failure to account for those who’ve simply dropped out of the labor market). Given the territory’s dire fiscal situation, prospects for economic growth in the near future remain dim.

Many have pointed to the Puerto Rican government’s stubborn austerity fixation as the primary cause of its depopulation and enduring recession. In 2009, then-governor Luis Fortuño, a supply-side oriented member of the Puerto Rican Republican Party, laid off 17,000 public employees and effectively nullified collective bargaining rights as well as existing, and future, union contracts in an effort to please foreign creditors and avoid a government shutdown. His parallel corporate tax rate reductions, designed to attracted investment in Puerto Rico, utterly failed to offset the significant economic harm caused by these cuts. Although the territory’s current governor is from the comparatively less right-wing Popular Democratic Party, he has embraced similar austerity initiatives in addressing Puerto Rico’s debt obligations.  

         

Puerto Rico: the Caribbean Greece?

Last week, leading financial officials in the Puerto Rican government issued a dire warning to their island’s top lawmakers, including Governor Alejandro Padilla. In a letter that left little room for interpretation, the experts claimed that the Puerto Rican government’s continued inability to grapple with its longstanding financing problems would likely lead to a government shutdown within three months. 

“A government shutdown is very probable in the next three months due to the absence of liquidity to operate,” the statement cautioned. “The likelihood of completing a market transaction to finance the government’s operations and keep the government open is currently remote.”

Puerto Rico has an overall debt of about $71 billion and is struggling to remain solvent. The government of the U.S. territory routinely turns to transnational hedge funds for financing, but these foreign lenders are now demanding that San Juan implement economically harmful austerity measures as a precondition for further funding. Without serious tax increases and spending cuts, Wall Street cautioned, the island would be cut off from the financing that it has come to rely on to stay afloat. In a move that reinforced these threats, Standard and Poor’s downgraded Puerto Rico’s general obligation debt rating from B to the junkish CCC+ grade last Friday.

The authors of last week’s warning letter, which included Puerto Rico’s Treasury Secretary, forewarned of the economic consequences of sustained inaction: “A government shutdown would have a devastating impact on the country’s economy, with payroll and public service cuts, with a painful recovery and of a long duration.”

In an effort to secure $2.95 billion in revenue, stave of a shutdown in the near term and please foreign lenders, the Puerto Rican government is currently pursuing an unpopular and regressive value-added tax (VAT) initiative. The new policy would radically restructure the island’s taxation system by cutting income taxes on businesses and individuals and introducing new levies on the sale of goods and services to Puerto Rican consumers. 

Critics of the VAT policy argue that the new taxes on necessary commodities like food could seriously undermine consumer demand and worsen Puerto Rico’s longstanding recession. They point to the harmful impact of a similar taxation experiment in nearby St. Lucia, where the introduction of new VATs on goods and services in 2012 contributed to sizeable increases in poverty and unemployment, as a vindication of their concerns. Puerto Rico’s stagnant economy is already suffering from a 14 percent unemployment rate (a figure which doesn’t account for the many workers who have simply dropped out of the labor market and is thus likely vastly understated) and a staggering 44 percent poverty rate. Government austerity under these circumstances could transform Puerto Rico into a Caribbean Greece and throw its economy into a tailspin.

San Juan is stuck between a rock and a hard place. If it caves to Wall Street and bucks domestic public opinion by opting for austerity, a bitter medicine which so often kills the patient it is purportedly designed to cure (e.g. Europe in the wake of the 2008 financial crisis), the already struggling Puerto Rican economy could be crippled. Still, the price of inactivity is likewise unattractive; nobody wants a government shutdown, with all the social and economic dislocations that would undoubtedly accompany one.