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At the end of June, U.S. President Barack Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), creating a seven-member federal oversight board tasked with bringing Puerto Rico’s $70 billion public debt under control. With appointees chosen by U.S. congressional leaders and the president, the board has broad powers to reconfigure Puerto Rico’s financial and economic policy. It will be able to initiate binding negotiations with creditors and, if needed, a court-supervised restructuring. A board will be announced in the coming weeks and will begin operations in September.
That is, if anyone will take the job. The board will serve until Puerto Rico achieves “fiscal responsibility and access to the capital markets”—both likely years away—and its members will not be compensated. And the first thing on the to-do list will be fending off attacks from a broad spectrum of groups contesting its claim to authority. Would you throw your hat in the ring?
Puerto Rico is in this mess for several reasons. A 1974 opinion from the Puerto Rican attorney general on the Spanish translation of “revenues” permitted a generation of officials to borrow from bond markets to balance the budget. In 1994, a health-care plan was established without a corresponding revenue stream to fund it, and the subsequent debt was bonded out through an agency originally meant to invest in development. In 2006, Puerto Rico imposed its first sales tax, then it sold bonds backed by the revenue to close deficits—a gambit indicative of an ailing state. The year 2008 brought the U.S. real estate crash; in 2010, the Federal Deposit Insurance Corporation closed three Puerto Rican banks that held about a quarter of the banking assets on the island; 2015 saw the start of an unprecedented wave of defaults on government bonds—three cataclysms that vaporized much of the island’s wealth.
This list only hints at the complexity of Puerto Rico’s economic collapse, and PROMESA is a correspondingly complex solution. But it has effectively galvanized opposition across the Puerto Rican political spectrum. From student activists, to local politicians, to labor leaders, to the asset managers who own Puerto Rican bonds, few stakeholders feel that the bill treats them fairly. Most believe that the process that created the control board was unjust and, by extension, the board will be, too.
The move to install a control board came hard on the heels of a U.S. Supreme Court decision, Puerto Rico v. Franklin California Tax-Free Trust, which found a previous attempt by Puerto Rico to restructure its debt unconstitutional. The decision incidentally ended any Puerto Rican illusion of governmental sovereignty. For generations, Puerto Rico has called itself el Estado Libre Asociado, or the associated free state—a status that avoided the taint of colonialism but granted open borders and federal largesse. After PROMESA’s passage, those that favor a change in status—whether to independence or to statehood—assailed the associated free state model, and even the model’s erstwhile supporters are now convinced that “free association” was a political myth. The board has the powers necessary to balance Puerto Rico’s checkbook, but to fix Puerto Rico’s kaleidoscopic fiscal and governance problems, it will have to soothe the island’s bruised dignity—a far taller order.
CARAJO LA JUNTA
On a typically sweltering morning in early August, activists blocked the entrances to UBS’ local headquarters on San Juan’s Milla de Oro, or Golden Mile. The protesters accused UBS and other banks of helping Puerto Rico raise new debt that the banks knew it couldn’t repay. That afternoon, the protesters reconvened outside the ritzy Condado Plaza Hilton to chant antiboard slogans and hurl insults of crisis profiteering. Meanwhile, Puerto Rico’s business establishment gathered in the hotel’s ballroom for a sold-out, $200-a-head forum discussion of PROMESA.
The frustration was as evident inside the ballroom as out. The president of a local trade organization told the crowd that he habitually left his lobbying meetings in Washington distraught—confused by the crisis and wary of the solution. Heckling, reflecting long-simmering tension between Puerto Rico’s large manufacturers and small businesses, interrupted the proceedings. The crowd grew restless as presentations meant to clarify PROMESA, a 161-page law, ran over their time limit. Speakers digressed to defend themselves or their clients against the slights of the agitators outside. Summing up, the Puerto Rican economist José Villamil said, “PROMESA is not something that we can internalize easily. The Puerto Rico we had until 2016 is gone.”
But what will replace the old Puerto Rico is unclear. Young Puerto Ricans have known only recession and destabilizing austerity—in the 1990s, almost half of University of Puerto Rico graduates went on to government jobs, but the government shed 30,000 employees in 2009 and has not hired them back. With the labor force participation rate at around 40 percent, many can envision a future only on the distant mainland. Frustration fuels conspiracy theories: some young Puerto Ricans say that the debt crisis is an imperialist false flag, and even the less conspiracy minded argue that anything short of repudiating the debt and prosecuting its underwriters is a concession to capitalist vultures. Carajo la junta—politely translated as “to hell with the board”—is a popular slogan.
Few stakeholders feel that the bill treats them fairly. Most believe that the process that created the control board was unjust and, by extension, the board will be, too.
These convictions animate el Campamento Contra la Junta, an Occupy-style encampment outside the federal courthouse in San Juan. Having taken root in late June, the encampment has survived Puerto Rico’s fickle summer weather, where flash flooding interrupts 90-degree days. Staging protests and teach-ins, campers hope to educate the people out of docility and into the streets. The camp’s surroundings are blanketed by street art, and one tag has leaked out onto walls and bus stops around the capital: La crisis paga los ricos (“The crisis pays the rich”).
Many of the activists living in el Campamento are university students—relatively fortunate members of Puerto Rico’s deeply impoverished society. But labor, environmental groups, and the church are also recruiting foot soldiers. While planning protests in line with el Campamento’s campaign—focused in particular on a clause in PROMESA that could lower the minimum wage from the federal minimum of $7.25 per hour to $4.25 for some workers—the labor movement has also been maneuvering behind the scenes to protect the over $40 billion in pensions that the commonwealth owes its current and future retirees. They are backed by their mainland affiliates—the Service Employees International Union (SEIU) and the AFL-CIO, which have deep experience bending the political process to their will—and see Puerto Rico’s next few years as likely to set a precedent in the national battle over unfunded public pensions. Pensions are a flashpoint, and one on which the control board will have to rule almost immediately.
Although el Campamento is a spontaneous movement manifested in tents, workshops, and drum circles, organized labor has spent much of the last decade behind closed doors, assessing Puerto Rico’s deteriorating economy and strategizing to protect jobs and pensions. They are leaving nothing to chance. This spring, Sindicato Puertorriqueño de Trabajadores (SPT), an SEIU-affiliated union, engineered an astonishing report through a public audit commission: over 2014 and 2015, nearly $4.5 billion of bonds were issued illegally. The report said that the bonds violated Puerto Rico’s constitution in multiple ways and implicated the same officials that impaneled the commission.
SPT has also helped organize a new political organization, Vamos PR, which is digging further back into Puerto Rico’s long list of outstanding bonds in search of more debt to deem invalid. The Vamos audit aims for a partial debt write-off and, more brazenly, prosecution of the government officials and bankers that raised the debt. This would entail a negation of much of the outstanding bond debt; the board would still be around but couldn’t move to privilege creditor repayment over pension liabilities. Vamos evinces no fear of retribution from banks or officeholders, a reflection of SPT President Roberto Pagan’s belief that the control board is a direct assault on his members, not a risk to be managed. In the office of the PPT (Partido del Pueblo Trabajador, Working People’s Party), a political party with ties to Vamos and the SPT, its gubernatorial candidate told me, “Our perspective is, we’re at war with the creditors.”
POLITICS AS USUAL
Populist irritability is not limited to the left. In the middle of the furor over the oversight board, a gubernatorial election is in full swing, and the New Progressive Party (PNP, for its Spanish acronym), the party more closely aligned with Republicans, spent the summer vigorously attacking its opposition, the PPD (Partido Popular Democrático, Popular Democratic Party), for lobbying for PROMESA in the U.S. Congress. Some PNP politicians believe there was no real debt emergency and argue that Puerto Rico’s pursuit of the right to restructure—and subsequent subjugation under a federal control board—represents the impulse and outcome of a feckless, corrupt government. The PNP has called for investigations into missing audits and has claimed that the PPD was swindled or handed kickbacks by slick mainland consultants. (Perhaps seeking to preempt the control board’s inquiries, Puerto Rico’s controller announced 24 separate investigations into government corruption in mid-August.)
Like mainland Republicans, the PNP has its own brash, anti-elitist wing. Although its candidate for governor has called the control board merely a “colonial outrage,” populist fire breathers in the legislature have more comprehensively condemned the board and could wield significant power in Puerto Rico’s restructuring process. In an indication of bipartisan antipathy, both the PNP’s conservative former Senate president and San Juan’s progressive mayor said that no Puerto Rican should serve on the control board. While the mainstream gubernatorial candidates have indicated they will work with the control board, if only to expel it from the island as fast as possible, Puerto Rican politicians are on safe political ground when they tell voters that the board will mortgage their futures and rob them of their sovereignty.
And as gubernatorial candidates assail the board to rally support, Puerto Rico’s many small-town mayors and the full-time politicos in its 78-member bicameral legislature are fighting for their livelihoods. Legislative consolidation and municipal mergers are the most obvious path to cost cutting, but the control board will have to weigh reforming a system that enables widespread rent seeking against courting the sabotage of mayors, legislators, and belligerent party machines.
All this in a Puerto Rico dramatically changed in the short time since PROMESA was passed. Created to clarify Puerto Rico’s fiscal problems and pause the crisis, since its passage PROMESA has instead accelerated efforts from officials and bondholders to claim Puerto Rico’s dwindling resources. In PROMESA, a local government that had been working with no margin for years found license to suspend regularly recurring debt service payments and use the extra liquidity to backfill payments to its pension system and municipalities. The result has been budgetary disarray: Puerto Rico’s Treasury recently trumpeted a 6.2 percent year-over-year increase in monthly revenues on the same day it announced indefinite suspension of tax refund payments. Local reports say the government has refused to negotiate with bondholders since PROMESA passed; the government says bondholders have canceled meetings.
The time-out was elusive on both sides: despite the White House’s stated hope that PROMESA would freeze creditor lawsuits, bondholders filed numerous motions and complaints in Puerto Rico’s federal court in July and August, each arguing that the local government had overstepped its new powers. The plaintiffs—hedge funds such as Brigade Capital and Fundamental Advisors, as well as bond insurance companies such as Ambac and Assured Guaranty—are well funded, inventive, and tenacious. (One, Aurelius Capital, sued Argentina on similar grounds for 15 years and is now among the plaintiffs accusing the governor of diverting millions designated for bond payments to the Office of the First Lady.) The litigants lobbied hard against PROMESA and now see the control board as the tool of a perfidious provincial government. They will ardently oppose any moves to favor other obligations—pensions, services, less senior bonds—over their own.
Puerto Rico’s debt crisis is a slow-motion tragedy that crosses ideological wires and fits awkwardly into old narratives. Outmigration, now on the order of Cuba’s Mariel boatlift, has aged Puerto Rico, and austerity—especially 2009’s Public Law 7, which effectively laid off every public employee with less than 13 years’ seniority—has been a body blow to the labor movement. Moreover, dependence on federal largesse is a fact of life on the island, where hundreds of thousands of households receive monthly food assistance from federal programs. In an e-mail, El Nuevo Día political columnist Mayra Montero wondered: “What would be the win here? [If the board is driven out], then what would happen?”
Those who see the control board as a threat are not asking that question. This summer, the litigants that want the debt paid and the activists that want it repudiated agreed on one thing: come September, they will have a common enemy.