Puerto Rico: The Crisis Is About Colonialism, Not Debt

Puerto Rico has been sacked by colonial powers for half a millennium. Is it any wonder it is in dire straits? Today, it is $73 billion in debt. As a point of comparison: Greece recently asked for about $82 billion from the European Union. The German finance minister thought it was funny when he proposed to U.S. Treasury Secretary Jack Lew that the Eurozone exchange Greece for Puerto Rico.
Linda Backiel
October 5, 2015

Tourists are fascinated by the heavy blue cobblestones that pave the streets of Old San Juan. Why they are there is as good an explanation as any for Puerto Rico’s current crisis. In the days of Spanish colonialism, they were ballast to keep the ships crossing the Atlantic from tossing about and blowing over. The ships came empty, and left for Spain full of gold, silver, and other riches stolen from the indigenous Taínos. The ballast left behind was used to pave the streets.

Puerto Rico has been sacked by colonial powers for half a millennium. Is it any wonder it is in dire straits? Today, it is $73 billion in debt. As a point of comparison: Greece recently asked for about $82 billion from the European Union. The German finance minister thought it was funny when he proposed to U.S. Treasury Secretary Jack Lew that the Eurozone exchange Greece for Puerto Rico. This is not funny; it is not even a good analogy. Neither the Germans nor the Eurozone have the power to “trade Greece” to anyone; its citizens can tell their prime minister what they think about EU debt proposals. Of course, they have to weigh their choice against the threat of being kicked out of the Eurozone.1

Puerto Rico has no such choice. Under the “Territorial Clause” (Article IV, section 3) of the U.S. Constitution, Congress could sell or trade Puerto Rico to whomever it wanted, without ever looking south to see what Puerto Ricans thought about it. And, although it paid Anne O. Krueger (first deputy managing director of the IMF, from 2001 to 2006) and two other former IMF officials $400,000 to make recommendations about Puerto Rico’s economic crisis, Puerto Rico itself—as a “territory” of the United States—has no access to the World Bank, the IMF, or regional financing.2

Governor Alejandro Garcia Padilla gave early warning that, as the Kreuger report concludes, the debt can neither be paid when due nor serviced. Puerto Rico cannot continue to finance the debt with additional loans at higher interest rates. The report also found that the debt has been growing faster than the economy, which has been shrinking for almost a decade. And much of the debt itself is currently due on bonds used to finance—the debt.3

On August 1, Puerto Rico failed to make a $58 million payment on “moral obligation” bonds issued by the Corporation for Public Financing. The indenture of these bonds has no enforceability clause, so bondholders have no straightforward means of enforcing payment. They are “guaranteed” by the moral obligation to pay from funds which must be—but were not—appropriated by Puerto Rico’s cookie-cutter imitation of the U.S. Congress.

The reason? The well went dry. “Nonsense,” say the bond holders. “You are still providing free university education to every qualifying student, and paying operating expenses. That money is owed to us.” Puerto Rico’s Secretary of Justice insists this is not a default, but a postponement of payment until some rational solution can be negotiated with creditors. It is, of course, a question of priority. The government is still paying salaries to keep the schools and hospitals open, the buses and ferries operating. But there is a wrinkle: Article VI, §8 of Puerto Rico’s Constitution (which was subject to modification and approval by Congress) makes payment of interest and amortization of the debt the first priority.

Puerto Rico is essentially running on bonds held by U.S.-based banks and corporations, although pension funds and mutual fund investors attracted by triple-exempt, high-yield bonds are also affected.4 Oppenheimer Funds and Franklin Templeton Advisers lead the way. And then there are the hedge and vulture funds (Blue Mountain Capital, Stone Lion Capital, Aurelius Capital, as well as several holding junk bonds from Puerto Rico, Greece, and Argentina). Together, they hold close to half of the debt.5

Underwriters include Barclay’s PLC, RBC Capital Markets, Morgan Stanley, J.P. Morgan, and the Bank of America-Merrill Lynch. Collectively they were paid $28.1 million in fees to issue bonds in March 2014 alone. Wall Street is literally paved with Puerto Rican debt, most of it classified as “junk.”6

The vultures are circling. They insist that whatever liquidity remains in the country is theirs, and they intend to get it. Some have been bleeding the anemic economy for years. Between 2006 and 2013, Puerto Rico paid $1.4 billion for financial “services” such as swap termination fees.7

Puerto Rico is in crisis. But the crisis is not about how to pay Wall Street. It is about the impact of centuries-long economic devastation on the men, women, and children—especially children—that live in Puerto Rico. While failure to pay the banks and the vultures makes headlines in the Wall Street Journal and the New York Times, the human misery caused by five centuries of colonialism does not.

Puerto Rico’s Labor Secretary Vance Thomas announced that official unemployment was 12.6 percent in June.8 That is the good news. The bad news is that unemployment figures decline as massive out-migration increases, following factory closings, the firing of one-third of government employees in 2009, and early retirement incentives grabbed by those relying on an underfunded pension fund. Workforce participation hovers at 40 percent, the majority without full-time jobs. The tax base shrinks and the population is increasingly dominated by those who do not work: children, the officially unemployed, those who have stopped looking for work or have never worked, and the aging.

In Puerto Rico, 45.4 percent of people live in poverty (an income of under $24,000 for a family of four)—but 57 percent of children do. This is well over twice the rate for the United States. According to the September 2014 American Community Survey, Puerto Rico has a median household income of $19,630—half that of the poorest state, Mississippi. And it had a higher rate of income disparity than any state. In Puerto Rico, 84 percent of our children grow up in impoverished communities, compared to 14 percent in the United States.9

In these communities, role models who have completed high school before going on to higher education, or even technical training and jobs, are hard to find. Those who succeed, leave. One hundred twenty-five residents of a single barrio or housing project may be charged in a single federal drug conspiracy indictment, so that three generations end up in jail, essentially for participating in the only economic activity visible in their community.

Puerto Rico’s social crisis is so dire that its Catholic Bishops’ Conference commissioned its own study, from the perspective of the social doctrine of the Catholic church.10 The report’s recommendations, based upon a comprehensive metaanalysis, are the opposite of those of Kreuger, et al. Cut spending to pay the debt, says Wall Street. Increase spending to grow the economy, suggests the Catholic Bishops’ report. Is anyone listening?

Hernán Vera Rodriguez, a dean of the Pontifical University of Ponce and author of the Bishops’ study, concludes that neoliberal policies have resulted in further neglect of native industry and agriculture—all significant factors in the current economic collapse.11

The case of agriculture is particularly dramatic. The 3.2 million inhabitants of an extraordinarily fertile island must import close to 90 percent of their food—almost all of which could be locally grown.12 The problem is both underutilization of arable land and, most glaringly, the absence of local food processors and distributors able to compete with U.S. agribusinesses.

These problems are aggravated by a U.S. law that requires all imported (and exported) goods to use the costliest shipping services in the world: that of the United States. There is now broad consensus on an issue that independentistas have championed for decades: under section 27 of the 1920 Merchant Marine (or Jones) Act, all coastal shipping between U.S. ports must be done by U.S. flag ships, of U.S. construction, and owned and operated by U.S. crew. Good for the U.S. shipping industry. Not so good for hungry Puerto Ricans. In addition to increasing the cost of food, it contributes to Puerto Rico’s exorbitant energy prices, which burden both residents and business. The Kreuger report, the IMF, and the New York Times all agree: the law helps strangle Puerto Rico’s economy.13 Congress seems disinclined to do anything.

How did things get so bad? Look no further than the majestic “Territorial Clause,” which proclaims that “Congress shall have the power to dispose of and make all needful rules and regulations respecting the territory or other property of the United States.”

History casts a long shadow. As visionary Puerto Rican patriot Pedro Albizu Campos (1893—1965) succinctly put it, “the yankees wanted the birdcage without the birds.” In 1898, the United States seized Puerto Rico from Spain as part of the spoils from the Spanish-American War—a war of U.S. imperial expansion. After a few years of military rule, Washington set up a puppet government. No Puerto Rican was named governor until 1948 (in order to counteract strong pro-independence sentiment), and none was elected until 1952.

During the last century, Puerto Rico had great strategic value for the United States. After 1961, this was reinforced by its propaganda value as a showcase for the benefits of capitalism to a Latin America charmed by the Cuban revolution. So the United States promoted investment, although at terms favorable to those with capital and outside of Puerto Rico.

Despite the cosmetic changes, with the creation of the current “Estado Libre Asociado de Puerto Rico” (literally “Free Associated State,” which the United States insists be translated as “Commonwealth”) in 1952, Puerto Rico has no real autonomy. Section 27 of the Jones Act is just one example. Another is section 936 of the U.S. Internal Revenue Code, which created tax incentives for U.S. corporations to operate in Puerto Rico. The key word here is “operate,” because what it promotes is not exactly investment; like the Spanish of the seventeenth and eighteenth centuries, the U.S. corporations could take home all the profits. But while in effect, the law created a sort of false private sector economy, with a marginal Puerto Rican working and middle class, and dollars that were deposited, however transiently, in its banks.

The demolition of this colonial prop of Puerto Rico’s economy is one of the causes of today’s crisis. Congress knocked it out with the support of the then-incumbent, pro-statehood Partido Nuevo Progresista (PNP, the New Progressive Party). Between 1996 and 2006, the benefits of the IRS code were phased out, promoting plant closings and removing capital from Puerto Rico’s banks and contributing to massive unemployment and depressed wages.

The statehooders were betting that the United States would rescue its impoverished colony by making it a state, rather than see it sink into the sea. They were wrong. The Berlin Wall had long since fallen. Today, Washington no longer views Cuba as a threat to the hemisphere, but a hot new market. Now that what was a CIA listening post in Cabo Rojo is an education center for a wild bird sanctuary, Washington has no need to rescue—or even prop up—Puerto Rico.

By 2007, when the Great Financial Crisis commenced, Puerto Rico was poised for a tailspin. The pro-statehood party had enthusiastically adopted the neoliberal model, promising to shrink government by firing one-third of the public workforce and selling off, totally or partially, state assets (including the telephone company, highways, and principal airport). PNP faithful gobbled up sumptuous contracts. The extreme neoliberal agenda cost the party the next election, but the current Popular Democratic Party administration, who favor greater autonomy under a permanent relation to the United States, inherited an economy in shambles. Both capital and workers fled north.

Why not bankruptcy for Puerto Rico, like Detroit, or debt reduction negotiations, like Greece? If you cannot guess the answer, I have not made my point clear. What the law protects is not Puerto Rico’s treasury, but Wall Street’s profits. This was vividly illustrated by the recent decision of the United States Court of Appeals for the First Circuit (in Boston), when it invalidated Puerto Rico’s desperate homemade debt relief bill. Of course, in the language of the courts, it is a bit more complicated.

Federal bankruptcy law is notoriously arcane, but, in essence, while states cannot declare bankruptcy, they do have the power to authorize municipalities and state-owned enterprises to do so. But under the Bankruptcy Code, as amended in 1984, not Puerto Rico. This is no mere anomaly of bankruptcy law, but—like Section 27 of the Jones Act—a consequence of the Territorial Clause.

No problem, thought those elected to exercise some degree of home rule over Puerto Rico’s internal affairs; we will create our own Recovery Act that would allow public utility corporations—which have created one-third of the debt—to renegotiate it. “Not so fast!” said the bondholders, who ran into federal court. And, as soon as the judges of the Court of Appeals finished watching the Fourth of July fireworks on the banks of the Charles, they ruled that Puerto Rico lacks the power to enact even a local debt relief law.

Under the Territorial Clause, Puerto Rico is a “state” for many purposes—including some (like the death penalty and wiretapping) prohibited by Puerto Rico’s make-believe Constitution. But it was not a state when it came to paying U.S. income tax on corporate profits realized in Puerto Rico, or when it comes to what passes for democracy in the United States: electing representatives to Congress or the president. Nor does it receive equal treatment under federal safety-net laws (Medicare, Medicaid, SSI, and others). In the lexicon of colonialism, Puerto Rico is a “state” when Congress says it is, or a federal court believes that it meant to, and not a “state” when Congress says it is not. Just like Humpty Dumpty.

Under a 1984 revision of the Bankruptcy Code (which may or may not have been deliberate), Puerto Rico is not a state. Mind you, Puerto Rico’s Recovery Act was carefully crafted to get around this problem. But the federal courts have decided that the imitation comes too close to the real thing for comfort. In the words of the Court of Appeals, “Our construction is consistent with a congressional choice to exercise such other options ‘pursuant to the plenary powers conferred by the Territorial Clause.’ If Puerto Rico could determine the availability of [bankruptcy for municipal and state-owned corporations], that might undermine Congress’s ability to do so.”14

In order to protect Congress’s “plenary powers,” Puerto Rico must continue to pay the piper and dance to his tune. Governor Alejandro García Padilla says he will ask for a Supreme Court review, but Puerto Rico has only one ear there, and it takes five to make a decision. Absent the unlikely decision to grant this review, the current state of affairs can only be changed by getting Puerto Ricans to walk on their knees to Washington and find more Congresspersons who care about the fate of Puerto Ricans than the fate of Oppenheimer, Franklin, Blue Mountain Group, Citigroup and the vultures. Congress expressed its concern about Puerto Rico’s crisis by leaving on August recess without considering virtually identical bills in the House (HR 480) and Senate (S 1164) designed to remedy this problem.

The only Puerto Rican judge sitting on the panel to hear the case (indeed, the only one serving on the Court that hears appeals from federal decisions in Puerto Rico, The Hon. Juan R. Torruella) penned a tragic concurrence. He had no choice but to agree, he wrote. The Supreme Court has reiterated that “Congress…is empowered under the Territory Clause of the Constitution…’to make all needful Rules and Regulations respecting the Territory…belonging to the United States,'” and thus may treat Puerto Rico differently from all the states “so long as there is a rational bases for its actions.”15

Judge Torruella would find no rational basis for treating Puerto Rico differently, but he was outvoted. As for the majority’s advice that Puerto Rico should undertake the pilgrimage to Congress, he concludes that, “this is asking it to play with a deck of cards stacked against it, something…this court has previously recommended, but to no avail.” The footnote hanging from this comment explains that the Court of Appeals gave the same advice to the people of Vieques claiming reparations for damage to their health and their land. “This is clearly a colonial relationship,” he remarks.16 What he did not admit is that change comes about only when the colonial subjects unite to defy the imperial power, as they did when they forced the U.S. Navy out of Vieques.

A July meeting with creditors at Citibank headquarters in New York was a huge frustration to all. Outside, demonstrators proclaimed that “Puerto Rico is not for sale.” The problem is that those attempting to govern Puerto Rico have sold all but its soul to the buzzards and bond holders. The question is, in the battle between soul and capital, who will win? Until the people of Puerto Rico organize to defend their soul, it is not even a stalemate: Black is playing with nothing but pawns.

Notes

Please note that although English-language sources are cited where possible, they are not always the best sources of information.
  1. “I offered my friend Jack Lewthat we could take Puerto Rico into the euro zone if the U.S. were willing to take Greece into the dollar union,” said Wolfgang Schaeuble at a Deutsche Bundesbank conference on July 9, 2015. Lew, the U.S. Treasury Secretary, “thought that was a joke,” according to Schaeuble. Rainer Buergin, “Schaeuble Tells Lew He’d Gladly Swap Greece for Puerto Rico,” BloombergBusiness, July 9, 2015, http://bloomberg.com.
  2. Anne O. Krueger, Ranjit Teja, and Andrew Wolfe, “Puerto Rico—A Way Forward,” June 29, 2015, http://gdbpr.com. All three are former IMF officials; the figure quoted is the total fee for the report.
  3. Of the $667,030 due to service the debt in August, over half was owed by a corporation created to pay the debt out of sales tax revenues; a quarter, by the Government Development Bank; and over an eighth by the agency for municipal financing, etc. Limarys Suárez Torres, “Puerto Rico Hoy,” El Nuevo Día, August 6, 2015, http://pressreader.com.
  4. Hedge funds and other creditors are using the argument that Puerto Ricans are also hurt as bondholders. This is true, and doubly painful. With over 500,000 individual bondholders, Franklin and Oppenheimer Funds alone hold 40 percent of the debt. See Mary Anastasia O’Grady, “Puerto Rico’s Debt-Relief Gambit,” Wall Street Journal, May 3, 2005, http://wsj.com.
  5. See Joel Cintrón Arbasetti, “The Trajectory of Hedge Funds Found in Puerto Rico,” Centro de Periodismo Investigativo, July 15, 2015, http://periodismoinvestigativo.com. Because the available information remains murky, Puerto Rico’s Center for Investigative Journalism is suing to learn exactly who holds what debt.
  6. "Puerto Rico Bond Sale Results in 28.1 million in Banks Fees,” Bond Buyer 123, no. 34676, March 17, 2014, 8.
  7. University of Puerto Rico professor and Working People’s Party 2013 gubernatorial candidate Rafael Bernabé Riefkohl, quoted in Ed Morales, “The Roots of Puerto Rico’s Debt Crisis—and Why Austerity Will Not Solve It,” Nation, July 8, 2015, http://thenation.com. See also Ed Morales, “How Hedge and Vulture Funds Have Exploited Puerto Rico’s Debt Crisis,” Nation, July 21, 2015, http://thenation.com.
  8. “Labor Department June Report Reflects Lower Unemployment Rate,” Caribbean Business, July 21, 2015, http://caribbeanbusinesspr.com. See also “Confiado el Secretario del Trabajo en que Continúe Tendencia de Reducción en Tasa de Desempleo,” August 19, 2015, http://foronoticioso.com.
  9. For the general Puerto Rican poverty figure see Alemayehu Bishaw and Kayla Fontenot, “Poverty, 2012 and 2013,” U.S. Census Bureau, American Community Survey Briefs, September 2014, https://census.gov, 3, 4. For the percentage of children who live in poverty and grow up in impoverished communities, see Annie E. Casey Foundation, Kids Count 2015 Data Book, 2015, 44, 45, http://aecf.org. For the Puero Rican median income, see U.S. Census Bureau, American Community Survey Briefs, “Household Income 2013,” September 2014, 2, https://census.gov.
  10. Hernán A. Vera Rodríguez, La pobreza en Puerto Rico: estadísticas, políticas públicas e impacto en la vida de los ciudadanos: una mirada desde la perspectiva de la Doctrina Social de la Iglesia (Ponce, Puerto Rico, 2015), http://mipucpr.org.
  11. Amanda Noss, “Household Income, 2013,” U.S. Census Bureau, American Community Survey Briefs, September 2014, https://census.gov. In addition to raw figures, this reports calculates the rate of income disparity (the Gini Index), in which perfect equality is represented by 0 and total inequality by 1. The national average is estimated at .481; Puerto Rico’s was .547. The only other jurisdiction breaking .500 was the District of Colombia.
  12. See “Expertos alertan sobre seguridad alimentaria en Puerto Rico,” El Nuevo Día, September 24, 2014, http://elnuevodia.com.
  13. See the editorial, “Puerto Rico Needs Debt Relief,” New York Times, July 1, 2015, http://nytimes.com. 46 U.S.C. §§289 and 12108 are highly protective of U.S. shipping, merchant marines, and steel industries, giving them a monopoly on coastal/sea trading between ports under U.S. jurisdiction. Between 2008 and 2013, six executives of the principal shipping lines to Puerto Rico pled guilty to anti-trust/price fixing violations. A bill to repeal or exempt Puerto Rico from the Act, sponsored by John McCain was soundly defeated in 2013. While a new bill is pending, it faces opposition form powerful lobbies. (At the end of July 2013, Res. Commissioner Pierliusi introduced the Puerto Rico Interstate Commerce Improvement Act of 2013 [HSC-518]. It was immediately referred to subcommittee, where it has seen no action.)
  14. Franklin California Tax-Free Trust et al v. Commonwealth of Puerto Rico, et al., Nos. 15-1218, etc., decision of July 6, 2015, Slip Opinion at page 31. Emphasis added.
  15. Harris v. Rosario, 446 U.S. 651, 651-2 (1986), quoted at page 51 of California Tax Free Trust.
  16. Ibid, 73, 72.

is a criminal defense attorney practicing in San Juan, Puerto Rico.

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October 17, 2015