THE government of Puerto Rico said in 2015 that the island could not pay its debts. Yet it was only on May 3rd that it kicked off the biggest bankruptcy case in America’s history. Public-sector debts total almost $74bn (around 100% of GNP). The drawn-out fiscal crisis has both imperilled Puerto Rico’s economy and upended the island’s politics.
Something akin to bankruptcy is possible only because of a federal law passed in 2016. Until then, the island’s legal status as a territory afforded it no escape from its debts (were Puerto Rico a state, its public utilities could have declared bankruptcy). The law established a “financial oversight board”, appointed in Washington, with the task of reaching a deal with bondholders. But it also allowed for bankruptcy-like proceedings should negotiations fail.
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A two-thirds majority of bondholders would have forced all of them to accept a reduction in the value of their debt. Yet agreement was always unlikely. Puerto Rica’s constitution says payments to holders of so-called “general obligation” bonds have priority over all other expenditure. But another group of creditors have first dibs on revenue from the sales tax. Clearing up this ambiguity seems to require a court battle. Both sets of creditors recently rejected an offer of 50 cents on the dollar.
In the meantime, Puerto Rico is in dire straits. The government’s latest fiscal plan, approved by the oversight board in March, seeks to balance the budget over three years. Doing so requires austerity cuts worth about 10% of GNP by 2020. The latest federal-budget deal bought a little time with more money for the island’s Medicaid programme, which provides health insurance for the poor (in Puerto Rico, about half the population). The cash was not enough to dissuade striking anti-austerity protesters from filling the streets on May 1st, disrupting public transport and forcing many firms to close for the day.
Because Puerto Ricans are American citizens, the island’s taxpayers can escape austerity by fleeing to the mainland, leaving fewer people to pay off the debt. The population is more than 8% smaller than in 2010. The economy has been in recession almost continuously since 2006. Unsurprisingly, the island’s politics are in flux. Ricardo Rosselló, the governor since January, promises a referendum on statehood for the island in June. A poll in March showed 57% support for the proposition; some of its opponents want a boycott of the vote.
However the island votes, and although the 2016 Republican election platform backed statehood, the proposal is unlikely to pass muster in Washington. It would almost certainly put two more Democrats in the Senate. But, at least from Puerto Rico’s perspective, the arguments against statehood are getting weaker. Traditionally, its opponents have said that Puerto Ricans have the best of both worlds: they use the dollar, get American passports, but keep Washington at arm’s length. With the oversight board in place, that claim looks a lot less convincing.