What's Next For Puerto Rico’s Debt Crises?

Puerto Rico debt crisis

Global economists and experts weigh in on the status of Puerto Rico’s debt crises 

 

“Puerto Rico has announced that it can’t afford to pay back its $72 billion of debt. It has turned into the US’ Greece,” David Francis highlights (“Puerto Rico is becoming America’s Greece” -Foreign Policy-).

The default is not unexpected: the Puerto Rican Governor had been warning for months that the country, weighed down by decades of slack economic growth and population flight did not have the cash to pay its creditors.

As a US Commonwealth, it can’t file for bankruptcy protection, something that Detroit did in 2013, and set up an orderly process for creditors to get back some of what they are owed. The White House has ruled out a bailout similar to the one in Greece.

Meanwhile, water is being rationed, Medicaid funds are short and more than 3,000 doctors have left the island. Experts have recommended closing schools there to save money (FP). “Puerto Rico is not America’s Greece,” Nobel prize-winning economist Paul Krugman insists (“America’s un-Greek tragedies in Puerto Rico and Appalachia” -The New York Times-).

SOURCE: GOVERNMENT DEVELOPMENT BANK FOR PUERTO RICO

The fiscal crisis is the byproduct of a severe economic downturn. The government was slow to adjust to the worsening fundamentals, papering over the problem with borrowing. There was a time when Puerto Rico did well as a manufacturing center, boosted in part by a special federal tax break, but that expired in 2006.

Changes in the world economy have worked against Puerto Rico globalization favor slow wages (the island shares the US minimum wage) and locations close to markets, which reduce logistical costs.

Puerto Rico's Unemployment Crises

SOURCE: BUREAU OF LABOR STATISTICS

Nonetheless, its status as part of the US means it receives social aid which needs to remain in place. “Puerto Rico is in the wrong place at the wrong time, but although the island’s economy has declined sharply, its population, while hurting, has not suffered anything like the catastrophes we see in Europe,” Krugman concludes (NYT). Barry Eichengreen (“America’s Greece: Fixing Puerto Rico could provide answers for Europe” -Der Spiegel-) thinks that Europe should have followed the example set by the US in dealing with Puerto Rico.

The US Congress will now pass legislation to enable the island’s debt to be restructured, which is what the EU should have done with Greece in 2010. “The country would have avoided the 25% decline in GDP, disaffected voters would not have punished their political class, and Europe would have been able to get back to business,” Eichengreen claims (Spiegel). 

Next- Where Puerto Rico's debt is today

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About the author

Luis Gallardo

Luis Gallardo is a global brand and marketing leader and expert in the areas of strategic brand management, brand engagement, brand expression, marketing, communications, business development, and reputation management. Former managing director of global brand & marketing at Deloitte, Luis provided leadership to Deloitte's member firm network of more than three thousand marketing and communications professionals. Author of the book: Brands & Rousers, The Holistic System to Foster High-Performing Businesses, Brands and Careers. Luis is the founder of Thap Group, a multinational consultancy focused on brand, marketing and communications strategy, and he sits on the advisory board of several high-growth organizations.