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April 11, 2016
Caribbean Issue Report: Puerto Rico's Financial Crisis
Puerto Rico i s undergoing a financial crisis due to its stagnant economic growth in recent years . According to the Washington Times , the cause of its economic collapse was credited to years of corrupt and insufficient state-run enterprises , careless spending a nd heavy taxation that eventually resulted in a gaping deficit . Puerto Rico accumulated more than $70 billion in debt and is facing a 45% poverty rate . Moreover, its population declined 7% over the past five years as job opportunities lessened . Last July, Puerto Rico's governor Alejandro Garcia Padilla declare d the debt unpayable in the foreseeable future . However, instead of pushing for economic resurgence , Puerto Rico's government decided to declare bankruptcy and seek heavy assistance from its US ally .
It is speculated that Puerto Rico's decision to declare bankruptcy may have severe consequences to its already torn economy. Bankruptcy will increase the commonwealth's borrowing costs by decreasing its credit ratings for years to come. The increase in borrowing costs could cause a greater spike in taxation for its taxpayers. Bankruptcy will also severely discourage future private investment as well as compromise current return on its bond investments . Moreover, according to the NY Times , on May 7 th , 2016 , Padilla signed an emergency bill allowing the government to halt payments to its debt in order to keep its government's cash flowing for essential services like paying its police and fire department. However, the signing of this bill le d to a huge increase in tensions between Puerto Rico and its creditors. Since this bill allows the commonwealth to postpone paying its debts for at least until next January , many of its creditors are showing signs of unrest and have lost confidence in Puerto Rico . The Washington Times reports that Puerto Rico's populous is already in great risk of suffering the consequences of the commonwealth unable to pay its debts. Allegedly , Puerto Rico's power utility , PREPA, "cut off electricity to a hospital over nearly $4 million in unpaid bills, part of a stepped-up effort by the heavily indebted agency to collect money amid the island's economic crisis."
As Puerto Rico turns to the assistance of the US government, Congress is wrestling with competing proposals from Democrats and Republicans in regards to the approaches it should take to regulate the commonwealth's finances. One proposition is to allow the debt restructuring through the fiscal control board which would essentially regulate the way Puerto Rico spends its money so that it is not driven deeper in debt. Howeve r, Governor Padilla and sever al other Puerto Rican official s have expressed their opposition to the idea of a board overseeing the territory's expenses. They view the oversight board as US infringement on the commonwealth's independence. Instead, the officials are urging Congress to allow Puerto Rico to file for something similar to Chapter 9 bankruptcy protection . However, they may have no choice but to comply with Congres s as conditions worsen in the commonwealth. According to the Foreign Policy magazine, Padilla mentioned that , without financial help, the Puerto Rican government would be unable to deal with the Zika virus because it did not have the money to pay for the resources necessary to combat the virus . Therefore , Puerto Rico's financial crisis could very well result in a humanitarian crisis.
An article in The Natural News writes about how many investors are raising red flags if the Puerto Rican government was to gain access to court-managed processes like the one proposed by Congress. Investors worry that these measures would likely open a path for some US states undergoing major fiscal problems to start applying for the same processes, which would worsen US's own debt as a result . More money would have to be taken out of taxpayers as they'd be the ones paying for the follies of the politicians and their failed policies leading to financial woes . One witness, T homas Moers Mayer, a bankruptcy lawyer argues that if the commonwealth is allowed access to these processes, there
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