Puerto Rico is in the midst of a great depression, the most severe for more than 100 years (Caraballo and Lara, 2016). The level of production of goods and services in the year 2015 -- adjusted for inflation -- is at the level of 1999. They have lost 268.000 jobs since the beginning of the depression in 2006 to 2015 and both poverty and inequality have increased between the years 2000 and 2012 (ICDH, 2016).

This severe economic crisis has caused a severe fiscal crisis (fiscal refers exclusively to the losses and expenses of the government).  When the US government dismantled the Puerto Rican economic model of inviting manufacturing by removing section 936 of the federal tax code without providing any substitutes, the Puerto Rican economy collapsed and, consequently governmental income through taxes collapsed. This resulted in a fiscal deficit that was rectified with bonds (loans) issued in the market of municipal bonds of the United States, an ample reduction in governmental services provided to vulnerable inhabitants and nearly 70,000 fewer employees in government since 2008 (ICDH, 2016). In spite of these measures of austerity, payments on the debt continued to grow when the financial market increased the interest rates that the Puerto Rican government should pay and when they continued taking loans to refinance overdue debts.

In 2013 the Puerto Rican government noted that, at the rhythm of growth of the debt, they would be unable to pay it, even if they assumed more drastic measures of austerity. Nearly 60% of the debt was from government-owned corporations and municipalities who could invoke chapter 9 of the federal bankruptcy laws if Puerto Rico were a US State. Puerto Rico was excluded from this disposition in 1984 without any apparent reason. Thus, these government-owned corporations of Puerto Rico have their own juridical identity but with no possibility of declaring bankruptcy. To fulfill this juridical limbo the local government approved a local bankruptcy law in order to restructure the greater part of this debt. The bond-holding groups sued the local government in US courts and won.

Despairing in the search for a legal mechanism to restructure the debt, in 2015 the Puerto Rican government went to the US Congress requesting access to a legal mechanism to restructure all their debt, including that of the central government. Bond-holding groups joined forces against this access and demanded -- in exchange -- a fiscal control board that would ensure the maximum payment through severe measures of austerity, as was done in cities -- but not States -- in the US. Puerto Rican bondholders and some representatives of the Puerto Rican diaspora backed the idea of a Fiscal Control Board. At the end of 2015, the Republican wing of the Congress negotiated a Fiscal Control Board with the Democratic wing in exchange for access to a bankruptcy mechanism and provided mechanisms of economic development such as federal credits to working families and some $3 billion to sustain the fiscal crisis (see project 2381 of US Senator Orrin Hatch). The negotiation failed because conservative sectors were opposed to the bankruptcy mechanism and the provision of funds to the local government.

The case of Puerto Rico surged again in 2016 when bondholders feared that Puerto Rico would fall into an ample default in July of 2016. This time there was no measure to counteract the economic crisis, which was left to an economic working group (the so-called “Task Force”) that is supposed to create a report with recommendations this year. At the end of June 2016, a Fiscal Control Board was approved (henceforth, the Board) with veto powers over laws approved by the government of Puerto Rico, with power to approve construction permits in 30 days, with members having legal immunity who were neither chosen nor recommended by the Puerto Rican people and who do not have to obey any Puerto Rican laws, with the capacity to impose or demand a fiscal plan to the local government and the power to demand that laws that can have a fiscal impact be approved by this Board, among others. In spite of the fact that this Board has all the characteristics of a Control Board, the PROMESA (Puerto Rico Oversight Management and Economic Stability Act) was euphemistically called an Oversight Board to weaken its impact in the media. It is important to note that the imposition of the Board was antidemocratic since Puerto Rico has no representatives with a vote in either congressional chamber where the project was organized, and Puerto Rico does not vote for the President who signed the measure.

The people who make up the Board have had links to bond firms, to creditors or formed part of recent governments.  One of the members took part in a high volume of debt that is due and directed the statements of COFINA (Corporation of the Fund of Urgent Interest, bonds based on sales tax revenues), which can be considered questionable for being employed for ends alien to the proposals (for example, operational expenses) and for avoiding constitutional debt limits. One of the members comes from an extremely conservative organization, the American Institute, which is not likely to value the distributive impacts of the crisis or give much importance to local sectors that should have priority for the recovery of Puerto Rico. The costs of the operations of the Board will be paid for by the people of Puerto Rico and will cost more than the Legislature of Puerto Rico.

Some casual observers say that the Board was the only option, but the US Treasury Department recently endorsed an emission made by Tunisia, to help refinance their debt. Why was this not considered for Puerto Rico, when Anthony Weiss (adviser of the US Treasury Department) himself testified in Congress that without the PROMESA these other extraordinary measures would be necessary?  Was it not possible to repudiate a great part of the debt that could have been declared illegitimate and pay part of the interest on the legitimate debt in exchange for a stay on litigation?  So, the phrase "PROMESA or a disaster", that was oversold in the media and in Congress, was a false dichotomy. Perhaps PROMESA is the disaster.

14/11/2016

(Translated for ALAI by Jordan Bishop)

References:

1)     Caraballo, J. y Lara, J. (2016). From Deindustrialization to Indebtedness: The Case of Puerto Rico. Retrieved on: http://homes.chass.utoronto.ca/~bobonis/CaraballoLara_PR_debt_16.pdf

2)     ICADH (2016). Deuda Pública, Política Fiscal y Pobreza en Puerto Rico. Retrieved in: https://noticiasmicrojuris.files.wordpress.com/2016/04/final-informe-audiencia-pucc81blica-pr-4-de-abril-2016-2.pdf

- José G. Caraballo, PhD is an assistant professor in the Business Administration College; researcher in the Interdisciplinary Research Institute; director, Census Information Center, University of Puerto Rico at Cayey.