The Greek financial crisis is a slow-burning tragedy that threatens to explode into full-blown catastrophe, but in North America, Puerto Rico is going through an even worse crisis. Puerto Rico is unable to pay its $73 billion debt, and 45 percent of the population lives in poverty. U.S. Treasury Secretary Jacob Lew has urged his European counterparts to take action on the crisis in Athens. “What I worry about most is an accident,” he explained in London in late May. “Everyone needs to double down and treat the next move as the last.” But Lew has been far less generous in his own backyard.
After all, the Commonwealth is mired in a decade-long recession marked by double-digit unemployment, a GNP-sized debt, and debt service payments that consume more than 20 percent of every dollar earned in the country—debt that is set to skyrocket still higher the years ahead. Predicted consequences include not only an increase of poverty and job losses on the island, but accelerated capital flight and migration to mainland United States as well. Unless substantial action is taken to mitigate Puerto Rico’s debt crisis, the territory will confront the very real prospect of a vicious circle of disinvestment, departure, and decline.
Puerto Rico’s ability to confront the crisis is constrained by its unique political status. When sovereign governments have trouble meeting their obligations to their creditors, they can devalue their currencies in an effort to impede imports, encourage exports, and attract tourists to visit and spend money. Even Greece could theoretically abandon the euro for a devalued drachma in an effort to restore fiscal balance. But Puerto Rico is bound to the U.S. dollar, and is thus unable to follow the standard sovereign default recipe.
The local government in San Juan is constrained by not being a U.S. state, either. When mainland U.S. municipalities have trouble meeting fiscal obligations, they tend to seek protection under Chapter 9 of the U.S. bankruptcy code, which is designed ineligible for Chapter 9 protection as an unincorporated U.S. territory, and thus has little choice but to go it alone. Of course, the irony is profound. While Lew calls for flexibility from his European counterparts and condemns their proclivity toward brinksmanship, he takes a page from their playbook in Puerto Rico by demanding a “credible” budget from the Commonwealth, offering little support in return.
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