Puerto Rico's Sovereign Debt Crisis

I posted in the wrong fourm.

I just read this article that basicaly states that PREPA has benn giving free electricity to municipal goverments, skate ring, hotels and water park. Not too fair to the people that has to pay the electricity and now PREPA is 9 billion in the hole. If they charge the towns then they raise the property taxes so the people get screwed again. http://flip.it/1obwR

Apart from some exaggerations meant to pander to this magazine's right-wing evangelical readership, I think this article is dead on.

http://www.worldmag.com/2015/12/puerto_rico_panic

I think this crisis, like the continuing anemia in the US economy, is due to an inequitable tax system. I would slash general business taxes from the current 50% to be more like those of the rest of the world (Nuevo Dia article in 2014), end all give-aways to specific industries and people, and eliminate deductions except on inventory purchases (an IVA). Same to individuals, but setting personal exemptions at 15,000 per parent and 5,000 per dependent (consumers being the largest driver of the economy). Then, of course, address the issues with bloated government and unsustainable pensions.

The way I see it, the politicians followed the natural inclination of a democracy to protect political patronage. It did so at the expense of the private sector, which, of course, means it shot itself in the foot.

I wonder what percentage of the PR GPD politicians in PR spend in strip joints and whore houses?
I wonder if the audited report will have those numbers.

http://www.npr.org/programs/latino-usa/#
Puerto Rico Underwater
February 5, 2016 Friday's Show

A more in-depth reporting on a historical perspective leading to current events.

The U.S. territory of Puerto Rico is in trouble. With a faltering economy, $72 billion of debt, and people leaving, Puerto Ricans are worried. Latino USA explores the Puerto Rican debt crisis.



I guess President Clinton pardon a few Puerto Ricans toward the end of his term, to attempt moral compensation for a political deal with the republicans. I didn't collect the dots before.

dgdlaw wrote:

The 4 governors in that time didn't know a 90 billion$ iceberg was in the way of clear sailing? They are the ones that should get locked up, not the simple dope stealing chump change from PR here and there who kept electing these string-pullers.

Exactly. People keep saying it's an economic problem, but the larger problem is political/cultural. The governors DID know. The previous one made a big show of austerity to win the love of Wall Street (but actually raised the debt). He earned enough popular resentment that the current governor won on a promise to hire back 50,000 -- 10,000 more than the previous one laid off. He made good on that promise (through quotas, the worst way to hire), and went further -- so famous for extra-budgetary spending larks that his own party in the legislature are at pains to find ways to get him to stick to the plan. In my opinion, they should have simply impeached him for violating the constitution of ELA, but such things do not happen here in a mutually co-enabling society.

Personally, I think he was gambling that, if Congress were forced to choose between supporting the Island's irresponsible spending habits into eternity or ending what little sovereignty PR has, Congress would make the political choice. That's what happens here, after all. All I can say is, "bad move."

The patronage system drives the need to sacrifice the private sector (in the form of double the taxes of practically any other nation in the world) to keep the government from shrinking. Getting rid of it obviously can't happen in a democracy where half the people support each main party, each half hoping to get hired by the winning candidate. This was the point of the observation in the article I linked, "Few realize they are part of the problem." Few look beyond adding a few coins to their purse -- but really, how many in the world would turn down the offer, "we will borrow as much as we need to to hire you and/or give you a raise?" But the truth is perhaps that the classical economic assumption that private motives sums to public good has failed here.

So I see PR as having inadvertently sabotaged ELA, through the complete lack of most politicians' foresight beyond winning the next election, and squandered its sixty-year venture beyond being a colony. Not that such fact will prevent anyone here from protesting muchly when the instruments of colonialism come slamming down again.

Other thing:

The manufacturing credits were a no-go to start with. Manufacturing is a bad idea in a place with limited domestic demand and where one has to import/export everything but have no way to manipulate currency to compensate (a la Greece, as someone mentioned). Or wages (minimum wage) for that matter, which makes the situation worse than that of Greece.

Why not agriculture, which is not as import/export dependent and has a strong domestic demand? My fear here is that the tax credits would favor external companies. Puerto Rico needs internal economic development. There is certainly a strong entrepreneurial culture here.

Another problem with these credit schemes is that they inevitably are tailored to fit the interests of some lobby to Congress (like the Jones Act). This continues the centuries-long colonial tradition of a government deciding: THIS is what Puerto Rico shall produce (to the exclusion of just about everything else). Why can't Puerto Ricans build a diverse economy based on our own felt needs? This is what I was getting at with leveling the tax incentives in the previous post. Why SHOULD agriculture be taxed to death in order to subsidize tourists or movies? You can bet the residents of Orlando, FL and Las Vegas, NV are not paying tourists to visit. That's basically what these tax exemptions and "free" electricity to the hotels are.

I think you have it just about right Motomataru. The problems are cultural. And political. And only secondarily economic, more as a symptom. People have written books on how it's happened, but Puerto Rico is a foreshadow of the United States. The current presidential election is a watershed moment in the nation's history deciding whether or not we shall retain the model of the founding fathers, or "progress" onward toward a more modern model held by an increasing percentage of the population. As both mainland American chickens and Puerto Rican ones as well all come home to roost, we will find out what the verdict is. Crony capitalism, socialism, or a return to the limited federal government, sound money model of the founders. If Puerto Rico makes the decision they are better off by themselves, I really don't think anyone is going to stop the protectorate U.S. territory from becoming fully sovereign and self-funding their socialist model. As I have said before, Margaret Thatcher's remarks apply, "The trouble with socialism is eventually you run out of other people's money."

I have a question:
The president wants congress to allow Puerto Ricans to be able to take advantage of the Earned Income Credit or so I heard. But most Puerto Ricans do not file any federal income tax forms, so how is this beneficial to the island?

Not sure it is that good for retires either since they normally have no children, also the no children rules states you have to be between 25 and 65, so anyone above 65 don't qualify either since too old and no children and are not working since they are retired.

Is there a point to it other than for those under 65 that regularly file federal, are still working and are under 65?

I don't see how this makes any difference to the majority of the 3.5 million Puerto Ricans living in the island. Am I wrong?

Don't see how u are wrong Rey. Fundamentals: At the basic, if you live in PR, you pay tax under PR tax law, not US.  One can wangle this way or that, bottom line meaningless political posturing not worth effort except for show.  So what's new?

They did this with the child tax credit, after all, leading to all sorts of abuse (selling children's social security numbers, etc.) The authorities here don't care, because it's money from taxpayers not from here.

Still federal, so that only applies to a small minority in PR, right?

I welcome the president and congress to put things in place that will be positive and meaningful for the vast majority of the 3.5 million Puerto Ricans. There is little value to the island for rules that provide beneficial to 100,000 and not the rest.

Seems that the government is finally cracking down on the cheats, interesting story
http://bigstory.ap.org/article/2c4abbab … tax-cheats

They should have been checking and cracking down all along.

Interesting perspective offered to folks who think that only mean ol' high-flying Wall Street  types are the ones that would suffer by a debt discharge in bankruptcy.

http://money.cnn.com/2016/02/22/investi … ndholders/

Note reference to the "double whammy" of bad debt and "plunging" property values.  Plunging?

It is so sad when private individuals put retirement funds in the "AAA, safe government bonds that can't be defaulted on."  Sound money, fiduciary responsibility is exactly why people have made fun of bankers as boring people.  Now we see whey we need the quality ones.  Sound and stable money isn't exciting or politically satisfying. We are all now in for seeing why banking shouldn't be done by emotions, but by hard facts and fair but responsible rules.  These folks are the tip of the iceberg.

I assume the hotel in Rincon is closed if the management was arrested. http://www.apnewsarchive.com/2016/The-a … 38550f00b5

I was reading about implementing the IVU around April first which would be around 14.5 percent and a business to business one of 10.5 percent. Apparently this is to replace the current 11.5% IVA and it sounds like it will eliminate regular income tax.

What the heck is the difference between an IVU and the IVA?

For retirees getting most of our income from the states, this will seem to end up raising taxes on us and potentially lowering it on natives working for a wage in the island if they limit their purchases.

There are several states with a sales tax and property tax but no state tax and I believe that the percentage is lower in the US than in PR. I would think that this changes are not business friendly and not likely to help grow the economy. What do you think?

ReyP wrote:

I was reading about implementing the IVU around April first which would be around 14.5 percent and a business to business one of 10.5 percent. Apparently this is to replace the current 11.5% IVA and it sounds like it will eliminate regular income tax.

What the heck is the difference between an IVU and the IVA?

For retirees getting most of our income from the states, this will seem to end up raising taxes on us and potentially lowering it on natives working for a wage in the island if they limit their purchases.

There are several states with a sales tax and property tax but no state tax and I believe that the percentage is lower in the US than in PR. I would think that this changes are not business friendly and not likely to help grow the economy. What do you think?

http://www.elnuevodia.com/negocios/cons … a-2011618/

Rey, no expertise here, but I found this article useful.  Think of IVA (new proposal) as a "value added tax" or min-sales tax at every step of the distribution of a product, e.g., importation, distribution to wholesaler, to retailer and to consumer.  The IVU is a tax at retail sale. Both tax consumption, not income.

In theory the IVA will increase taxes collect as the only way a business can get back the 10.5% tax it paid to the previous business in the supply chain is to charge the next business in the chain the 10.5% tax, with the consumer being the end point. Of course these are for recorded expenses. Activity under the radar I guess will still be there.

If PR income tax is abrogated (and I don't know if this is factual) then persons with disposable income that is saved and not spent will benefit and persons that must spend everything they earn in order to get by will be penalized.

I just saw an article that about about 1,200 homeless in PR. Most in the metro area. It is believed that over 52% are due to chronic drug usage, 29 percent due to family issues and about 28 percent due to loosing a job. A large number (63%) was also determined to either have not gone to school or did not finish High School.

It is a sad thing, in the last 5 years about 25,000 families have lost their homes, 4,000 of those in 2015. About 20,000 more families are close to 90 days behind in their mortgage and at risk of loosing their home. No numbers in the article about those that rent and can't afford it.

Unfortunately for new comers, banks moved very slowly in getting the homes into the market, so the homes decay and become a forest which makes the property harder to sell.

Here is the article (Spanish) http://www.primerahora.com/noticias/pue … o-1140277/

There was a meeting yesterday with the PR government about what congress plans to do. Apparently the government is not very happy, seems congress is preparing to create a board with strong powers over the government budget and the board will be the one negotiating with the bond holders. Seems that the general government debt will not be addressed, only the debt of the other government entities like the AEE for example.

If this does not change it looks like only a portion of the debt will be renegotiated and it will not be a chapter 9.

Everyone is up in arms in the government about this, Spanish article: http://www.elnuevodia.com/noticias/poli … 9-2172213/

Check English newspapers they may carry the news about this also.

What did they expect? Sovereign states cannot avail themselves of Chapter 9, whatever the statehood people and independentistas say. One can't intentionally run up an unpayable debt to maintain size of government, as the populares did, and then hope a solution will magically become available. One can't demand that Congress come to the rescue but then insist on sovereignty: it's a self-contradiction. They talk of a local board of control, but isn't that what the PR legislature is?

Practically the whole lot talk politics as usual while burning down the country.

News article about Puerto Ricans changing the face of politics in Florida.  We'll see how the news media reports on this next Tuesday in the primary elections.  I frankly will be surprised if there isn't a question about PR and its debt in the Republican debate on CNN tonight from Miami.  Now the politics are spilling over into the mainland presidential election.

http://www.latimes.com/nation/politics/ … story.html

It sounds to me like they will help prepa and others but not the goverment.
The control board is unlikely to contain many Puerto Ricans, they will hold the purse and decide what the goverment will spend money on and how much. So basically, throw away the agreement on Puerto Rico having a goverment elected by the people. The control board will be the real power in the island.

I expect that there will be a lot of protests and work stoppages, some led by the politicians. The people will also join in, not just the goverment workers and politicians.

The island needs a lot of bussnes growth and jobs, any help along that line is going to take several years to start showing fruits. Meantime more people will head for Florida and the people that stay will have to pay a lot more taxes to pay the running of the ciuntry and service the debt.

The 4 things, renegitiation of some of the debt, better busiess environment, fair medicare, and the tax credit to the people (federal tax which applies to few people) will take a long time to show fruit. We are not going to get it, but an actual fat bail out is what is needed to kick start the economy and get things moving. I dont think this is going to work, we are too deep in the hole aand all we have is a spoon not a ladder.

Yes, major reduction of the goverment, efficient proceses, corruption elimination and prosecution of those that got us there are needed regardles of the type or extend of the help, otherwise we will be in the same situation soon after. But there has to be a way to get out of the problem fully within 3 years not 30.

These guys are rich..probably nothing mayor than a negotiation or a bankrupty..stayed there two weeks ago and all seems fine

"In God we trust" used to be, and the U. s. used to be blessed, as we've turned away from God and look to man the U. s. is becoming a mess.
"God blesses those who are obedient and curses those who are disobedient".
Who will join me in turning to God in prayer for Puerto Rico?

GOP debate was a lot of Cuba.  The actual electorate in Florida has far more Puerto Ricans voting than Cubans now.  (They talk about PR's are concentrated along the I-4 highway corridor.  Note the big-hearted Puerto Rican man just above hails from Lakeland, FL, smack dab on I-4.)   Yet from CNN's moderators tonight?  Absolutely nothing.  Net result will be "those damn Republicans don't care about PR."  Gotta wonder if it's on purpose.  I mean is CNN really that dumb?  Maybe, but I'm thinkin' not.

As to the man's call for asking God for Puerto Rico, I will pray for Puerto Rico.  I will also pray for the United States as a whole.  PR owes $72 billion dollars its 3.3 million people can't pay back.  When one combines unfunded mandates together with "official" national debt, each baby born today in America and adding to the 330 million of us, came into this world with his or her share of the U.S. debt at over 1 million dollars for each and every one of us.  To say we are in need of an economic recovery does not grasp the problem.  To my Puerto Rican brother above, this is most definitely a man-made problem requiring a God-sized solution.

Opening the valve of a pressure cooker relieves the pressure but does not keep the water from boiling still. It needs to be moved off the fire.
Refinancing the debt will be like taking the relief valve off the boiler, but it will not take the heat off.

That is why one single answer is not going to eliminate the problem in PR. Some say an economic growth program is needed and I agree that it is needed for the long haul, but it is going to do little to bring back the people and to grow the economy for at least 3 years, 200,000 jobs are not created overnight.

We can help a little by starting businesses that put people to work but it is 1 here and 1 there, it takes a lot of cash to put 200,000 back in the working class.

Unfortunately big G does not tend to hand out money and tends to be picky which prayer he answers, but it does not hurt to pray.

It is a complex problem that will not go away for a long time, it is going to take a lot of intervention not just 1 or 3 things to get us out of the big hole.

Looks like Tuesday they plan to release the proposal. Leaks by both republicans and democrats show they are somewhat apart in their interpretation of the bill. This is bad news if they have differing opinions of the same document.
Here is an article that may interest you http://m.nbc12.com/nbc12/pm_/contentdet … d:GULWMpLH

Rey, you know is election year they are going to interpreted as it fit to them. I'm for having some oversight from the federal government. It had been proven that leaving it tthe hands of the island politics they will find a way to steal the money. Unfortunately our political parties are corrupt and can't be trusted to be honest about the process. Not to say that it is any different in the states.

I beat you 10 years from now we will still having this issue in some form or another.

But wait.....Trump is going to win and sell the island to another country. 

He will probably sell it to Russia for a big nuclear submarine base.
My point is that if both parties read the same document differently, then it is not clear enough and PR will get the shaft.

Yup, as always!!

People please vote and keep trump and Hillary out .Bernie Sanders is the only one we can trust to fix Puerto Rico . To be honest pr really need to just legalize marijuana and be done with it .This will save the island and it will save it quickly. However the pr government can no way do anything but over see it otherwise the corruption and misuse of funds will continue

There are a lot of different drugs out there, it has not saved Colorado and other states. People prefer to buy from the dealer because it is cheaper than from the clinic because taxes makes it more expensive. You would have to legelize them all. Somebody that uses cocane cares not about mariquana.
Besides the island is a transport hub, most of the drugs are not for public consumption.
As to politicians, some are better than others, but they are all corrupt in one way or another, none have a clean diaper.
Your choices tend to agree with me to some degree, but I do not trust any of them.

I respectfully disagree with this point of view.
Most of all, I shall not be able to vote in the Presidential election despite of the fact that I have been a US citizen all of my life.  This right is denied to those who live in Puerto Rico.

We shall see on Tuesday what the politicians propose for PR, but a vote for the future precident is not in the cards. What ever rhey propose for the island, the politicians will oppose one thing or another. A board that supplants the powers of those elected into office is not going to be taken well.

It must be weird for you frogrock, not having the right to vote for the precident after all these years.

Rey, I hope the board is overseeing by the federal government. With the politicians history in the island, that will be the only way to see some transparency. It is sad to say but I don't trust the local politicians to do the right thing for the island.

adlin20 wrote:

Rey, I hope the board is overseeing by the federal government. With the politicians history in the island, that will be the only way to see some transparency. It is sad to say but I don't trust the local politicians to do the right thing for the island.

LOL

It is almost certain non-residents who don't really see Puerto Rico as part of the US will not "do right" by the Island. Although I welcome a new perspective that takes the financial issues seriously, I doubt matters will be handled with any sensitivity to the Island's culture or the social needs here.

I agree with you motomataru,
Unfortunatly like Adlin said, our politicians got us into this mess and the corrupted judges, police, politicians, bankers and other business interests have been conspiring to milk the island off everything they can. It is hard to put control on their hands since it is likely that their ineptitude, corruption, and ego will likely continue the mess and any funds and savings will likely line their pocket and their friends pockets.

This one is for the books, congress and their board will likely override the elected officials which makes financial sense, but overriding the will of the people that elected them and making them suffer additional financial loses due to fees, taxes, lost jobs, cuts in retirement or elimination of retirement is not a good thing. Needless to say all of this is against the will of the people and further points clearly that PR is and has been a colony, self goverment is only being allowed to a point at the will of congress. We know congress mostly works for the special interest groups that let them stay in power which is the thing that congress cares about. So either way PR is likely to get the shaft.