As the U.S. territory of Puerto Rico dominates headline news with the predictable unraveling of its municipal debt, it is striking how people who should know better treat this crisis as a matter affecting some remote banana republic with no impact on the U.S. A victim of historical ‘otherness’ Puerto Rico’s residents, Americans by birth, are treated like second class citizens by decision makers in the U.S. in whose hands their fate lies. Teetering in the economic balance, with Alejandro García Padilla’s (Puerto Rico’s governor) eerily Greek admission that the island cannot service its debt, a perilous game of economic brinksmanship is coming to a head at the same time the Eurozone’s Greek drama reaches its climax. Unlike Greece, there are no lines at banks or capital controls in Puerto Rico because the island’s residents and creditors alike are counting on the full faith and credit of the United States.
Simply put, the island’s $73 billion municipal debt crisis is every much a concern for mainland American’s as Detroit’s collapse and recent revival or the bailout of Wall Street before it. 3.6 million U.S. citizens, whose average income is $19,500 (poorer than the poorest state of the union) are suffering through the unraveling of their economy in very real ways that all Americans should care about. Puerto Rico’s government in admitting the mathematical impossibility of servicing its debt is legally, technically and politically paralyzed. Insidiously the island’s administration is facing the dueling forces of lawyered up hedge funds demanding repayment and a shrinking tax base due to the mass exodus of the elite and the middle class. According to a recent article, from 1980 to 2000, an average of 12,000 island residents gave up year round sunshine to move to the U.S. mainland. This number has now accelerated to an annual average of 48,000 over the last few years. This internal migration profoundly changes the U.S. electoral landscape in key battleground states like Florida and further strains stateside budgets as municipalities cope with unanticipated population growth. One must recall that while Puerto Ricans cannot vote in Presidential elections from the island, once they take up legal residence stateside, they have the right to vote.
In short, power rests in Washington and like FEMA rescues Puerto Rico following a hurricane, so too shall the island be rescued following the impending economic storm. U.S. taxpayers everywhere should demand fiscal responsibility when it comes to Puerto Rico’s economy - both on the island and in the mainland. Clearly the island’s leaders are culpable of many years of reckless credit-driven spending. In an economic crisis it is irresponsible to ask how we got here, the key question is what do we do now? An orderly economic revival, the luxury afforded to other U.S. municipalities through Chapter 9, will be much less costly than the decade long bailout and stimulus proposition that will invariably be paid for by U.S. taxpayers.
When asked by experts, politicians and journalists why America should care about the island’s woes - the answer is quite simple, it is America and Americans that we are talking about. If the confraternity argument does not hold, there are other real risks to consider from the U.S. remaining a bystander as American’s sink into the Caribbean Sea. The first, an argument made in March of this year, is how sure are we that we are not facing another Lehman moment, where the choice not to intervene in Puerto Rico triggers wider economic chaos. The second, is that hedge funds and institutional investors, the principal holders of Puerto Rico’s debt, are in effect betting on the full faith and credit of the U.S. Municipal bonds, historically a near risk-free asset class, are widely held by cautious investors in whose portfolios many a retirement and educational dream lies.
As the recent global financial crisis taught us, privatizing gains while socializing losses is a dangerous economic policy and financial contagion cannot be easily quantified or reversed. Puerto Rico should not be given a free-ride for decade’s worth of fiscal mismanagement. As Americans, the island’s residents deserve the same right to reinvent themselves and to demand more of their elected officials in an accountable an orderly debt restructuring. Failure to do so risks further tarnishing U.S. credit worthiness and increasing the debt burden shouldered by tax payers.
This article was originally posted in The Huffington Post.