Fri October 18, 2013
Puerto Rico Struggles With Debt Crisis
Puerto Rico has about $87 billion of debt — that’s about $23,000 for every resident.
The island nation is a U.S. territory, but it can’t declare bankruptcy.
Puerto Rican politicians are looking to raise taxes and cut pension obligations.
- Marty Schenker, executive editor at Bloomberg News. He tweets @mschenker.
ROBIN YOUNG, HOST:
From NPR and WBUR Boston, it's HERE AND NOW. I'm Robin Young.
The US isn't out of the fiscal woods yet. The new deal only authorize government spending through January 15, and only extended the deadline to deal with the debt ceiling or borrowing money to pay off bills from money already spent to February 7. But the US territory of Puerto Rico is in real trouble, $87 billion of debt. Some are saying it could be the domino to fall after Detroit.
Marty Schenker is executive editor at Bloomberg News. He joins us most Fridays. And, Marty, how did Puerto Rico get in this mess?
MARTY SCHENKER: Well, it's a long and sort of sorry story. As Americans fly into Puerto Rico and look at their lush beaches, they don't recognize that the US IRS has bestowed great tax benefits to Puerto Rico over time. But they've been chipping away at them. They would provide benefits to drug companies, research and developments to guard manufacturers. Those have all been cut back. The population is declining. And the only way out is to borrow money and lots of it.
YOUNG: Yeah. And so people have been leaving the island, less tax base on the island. They've been borrowing money. How do US financial markets react to this? We know that the bond rating is one notch above junk. What does that mean?
SCHENKER: Well, I mean, it means that for people who rate these bonds, the rating agencies assign a value to let investors know what the chances are they're going to get repaid. Junk is the lowest level, meaning their chances of not getting paid at the highest. So the bonds have really had a terrible year up until about two weeks ago when they've started to rally. At one point, the yield on Puerto Rican bonds, when you account for their tax exempt status, was higher than that of Venezuela.
YOUNG: Yeah. Well, we know that just this week, we're reading that the government is taking in more tax revenue because they decided they'll get crack down on tax cheats. So they're getting more revenue there. But what happens, Marty? I mean, if it's a city like Detroit, you have states and courts that step in. What happens with the territory?
SCHENKER: Well, you know, the comment with the Puerto Rico is kind of a unique institution, and there aren't a lot of precedents for what happens. One thing we do know, they can't declare bankruptcy because their constitution doesn't allow it. They could simply default and not pay the bonds. And that would create a firestorm in court as people went after assets.
YOUNG: Well, so what do you think will happen?
SCHENKER: Well, the governor has taken various assertive steps. He's raised taxes. He's increased pension contributions. He's raised the retirement age. And the markets have really reacted positively to those steps. So they say they will try and work it through. And, in fact, the bonds have rallied on those measures, but there are some investors who think you should just stay away.
YOUNG: Look, we know that Puerto Rico - many people in Puerto Rico for years have been pushing to become a state. Others are against that. It is a territory. But what does that mean? Does the US have an obligation to step in and bail Puerto Rico out?
SCHENKER: Well, the US can't even bail itself out, so I don't think they're looking to take on another obligation in Puerto Rico. And, in fact, they've said they're not going to step in.
YOUNG: And what does this mean for the people who live there?
SCHENKER: Well, it means tough times. I mean, taxes will go up. It means services will decline. But ultimately, they are going to have to pay for this debt that's out there, 70 billion of it.
YOUNG: Yeah. Well - so it might also mean that if you're thinking of a getaway this winter and you don't want to go far and you want to support an economy, think Puerto Rico.
SCHENKER: I always do.
YOUNG: Marty Schenker, executive editor at Bloomberg. Thanks so much.
YOUNG: Up next, a former Republican congressman's prescription for what ails Washington. HERE AND NOW. Transcript provided by NPR, Copyright NPR.