We have arrived at the shores of the Rubicon. The credit rating agency Standard and Poor’s dealt a body blow to Puerto Rico’s distressed economy by downgrading its general obligation bonds to junk level. Governor Alejandro García Padilla floundered in his response, stating that he will increase revenue and decrease costs, but has not explained how. The U.S. Treasury Department of President Barack Obama’s Administration has made it clear that it will leave Puerto Rico to its own devices.
Further darkening the picture is the coming of the next horsemen of the Apocalypse. Moody’s followed suit yesterday. If Fitch Ratings makes the same decision, and the island defaults on its $70 billion debt, the scenario will be one of implosion.
How did we get here? Administration after administration in Puerto Rico paid the bills with a credit card, borrowing to prop up government and live day to day. Puerto Rico has essentially tripled its debt in the last 12 years – going roughly from $24 billion to $70 billion. In a Faustian pact, investors opened their coffers to Puerto Rico and turned a blind eye to unfettered borrowing because the islands bonds have historically generated some of the highest returns in the market.
Alongside massive borrowing, the economy remained flat in real terms. The population decreased by more than 138,000 since 2006, a diaspora not seen since the 1950’s, thus increasing the burden of the debt. Added to this mix is an incrementing crime wave that tops Mexico’s and is mostly fueled by the drug trade that uses the island as a launching pad to the United States.
García Padilla and his administration have been struggling to comply with Wall Street and plug the debt, raising taxes and reforming the teachers’ pension plan, neither of them a popular move. He has announced further plans to cut costs prior to going back to Wall Street to ask for more money later this month.
But now that the proverbial has hit the fan, Wall Street has grown increasingly skeptical of Puerto Rico’s ability to pay. The island can’t declare bankruptcy. And if it went into default, its Constitution gives priority to the repayment of debt over all other claims. That means that debt obligations need to be paid before government salaries or pensioners. This will go down well.
Meanwhile, US media is more preoccupied with how the bondholders will react, rather than how this will affect an already battered island and its people. There are some on Wall Street that are holding back a buying spree waiting for things to get worse on an island they know little about and could care less for.
Recently, a legislator on the island called for a celebration of the Day of the Absent Puerto Rican, celebrating the island’s diaspora and enticing them back for a day of fun. After I cried with laughter, it made me think. Bring back the best and the brightest to aid an economic recovery and construct a path towards decolonization? The overarching issue is that, somehow, we must get economic growth back into the mix. It is imperative that we bring back financial and human capital to get the economy growing again. Maybe this is the cavalry we need.
Susanne Ramirez de Arellano is the ex- News Director for Univision Puerto Rico and a writer and journalist living in New York City. She has a blog in El Nuevo Día called Susanne en la Ciudad. Comments can be sent to [email protected]. You can follow Susanne on Twitter @DurgaOne.