There is a small island located next to a major economic bloc that is struggling to reduce its debt burden while its government is shouldering massive interest payments and its people are emigrating in droves. Sound familiar?
The cliff-edge fiscal position that the cash-starved Caribbean island of Puerto Rico, a US territory, finds itself in is not dissimilar from where Ireland was a few years back, though with one big difference: where the Irish government, supported by a bailout from the International Monetary Fund (IMF) and the European Union, sought to inflict losses on junior bondholders holding the riskiest kind of debt in the Irish banks, Puerto Rico does not even have an entity to turn to for a bailout and the bondholders are standing in the way of finding one.
Puerto Rico defaulted on a $422 million (€369 million) debt payment due on Monday after the island’s governor Alejandro García Padilla had warned that its financial crisis – it has debts of $72 billion, six times the average for US states – meant it could not make the payment. Another $1.9 billion falls due in July.
García Padilla managed to buy time with creditors who agreed this week to 30 days of negotiations and to abstain from legal action on the debts.
Chapter Nine bankruptcy
The battle between the island and its creditors is not being fought out in the courts or even on the island itself but in the US
Congress
. Puerto Rico is not a US state, so it cannot file for Chapter Nine bankruptcy that has allowed American municipalities and cities such as
Detroit
to renegotiate debt-rescue deals.
Neither is the island an independent sovereign state, so it cannot go knocking on the IMF’s door for help. The only place that can help Puerto Rico is 18 blocks east of the IMF in Washington: Capitol Hill.
To prevent the US territory going the way of Argentina, years of hard legal battles with creditors and soured relations in the international money markets, legislation passed by Congress would give an independent oversight board the power to help the island sort out its financial affairs while approving a court-supervised restructuring of Puerto Rico's debt pile.
The problem is that a Bill proposed by Republicans in the House of Representatives has stalled amid a fierce lobbying onslaught by the island's hedge-fund creditors against a rescue package that they claim, in alarmist television adverts, would be a "taxpayer bailout". US treasury secretary Jack Lew has warned that a taxpayer bailout might be in prospect. If Congress failed to act, there would be a "series of cascading defaults" and lawsuits, he warned. Paul Ryan, the Republican House speaker, and the Obama administration support the legislation but members of Congress are dragging their heels.
“The debt is not payable,” García Padilla, the governor of an island of 3.6 million people, warned last year in stark terms. “There is no other option. I would love to have an easier option. This is not politics, this is maths.”
Tax breaks
Puerto Rico’s insolvency crisis stems from another act of Congress, the decision to phase out, from 1996 on, tax breaks, known as Section 936, introduced in the 1970s that exempted US manufacturers from federal tax. The economy suffered as tax incentives ended and the island entered recession in 2006 and was forced to borrow heavily. The crisis deteriorated further with a steep decline in house prices. Poor economic prospects led many Boricuas, as the island’s residents call themselves, to head to the US mainland.
The lobbying effort is not just going in one direction. Lin- Manuel Miranda, the Pulitzer Prize-winning creator of the hit Broadway show Hamilton, and the son of Puerto Ricans, last month made a desperate plea to Congress to come to the island's rescue and even offered free Hamilton tickets if he thought it would help.
“Our island is in crisis, and if I can help in any way, if I can get more eyeballs to this crisis, it’s a fixable problem,” he said in an emotional appeal.
Something else Ireland and Puerto Rico share are common adversaries in their debt battles. Among the latter's creditors are debt vulture funds Fir Tree Partners and Aurelius Capital Management, the New York investment firms that took legal actions in the Irish courts in 2011 to stop the government imposing losses on them and other junior bondholders in Anglo Irish Bank and AIB.
Aurelius, which has fought Argentina too over its long-running debt tussles, warned at the time of Dublin’s legal battles with bondholders that the government’s move “would chill foreign investment in Ireland for years to come”. (Aurelius later settled its action with the government.)
Expect more of this kind of talk as another island tries to sort out its financial mess.