“Puerto Rico is a territory appurtenant and belonging to the United States, but not part of the United States … ”
U.S. Supreme Court, Downes vs. Bidwell, 1901
Wall Street was shaken this week by the biggest municipal bond default in U.S. history when Puerto Rico’s cash-strapped government failed to pay a small portion of the massive $72 billion it owes to bondholders.
“They have taken the first steps toward financial suicide,” one financial analyst claimed Monday, with more missed payments on the horizon.
But Puerto Rico Gov. Alejandro Garcia Padilla warned plainly a month ago that “the debt is not payable.”
After all, the island’s economy has been contracting for a decade. With unemployment over 12%, thousands are fleeing to the continental U.S. annually. This year alone, $2.8 billion in debt payments are due — 17% of government revenues. And next year, it will climb to 20%.
You can’t fix an economy that’s drowning in debt.
In a crisis like that, the average person, the average city or corporation, would resort to bankruptcy protection.
General Motors did it. So did Detroit. So did Orange County, Calif., years ago.
Gov. Garcia Padilla has one of the country’s top rescue experts advising him, former Lt. Gov. Richard Ravitch. He’s the same guy who helped save our city from financial collapse in the 1970s and who was involved in Detroit’s debt restructuring. Ravitch has been selflessly working as a volunteer.
But that analyst who likened a Puerto Rico default to suicide doesn’t have a clue. Like so many in the financial industry, he ignores how Puerto Rico’s crisis is rooted in Washington’s long history of unequal policy toward the island, a policy that blocks any turnaround.
“Puerto Rico remains a colony of the United States,” says Bronx Rep. Jose Serrano. “It is treated differently even though its 3.5 million residents are U.S. citizens.”
The legal basis for that unequal treatment goes back to a series of Supreme Court decisions in the early 1900s known as the Insular Cases.
In one of them,, Downes vs. Bidwell, Justice Edward White ruled that only those parts of the Constitution apply in U.S. territorial possessions that Congress chooses to apply. Puerto Rico, White concluded, belonged to, but was not part of, the United States.
Ever since the Insular Cases, all major decisions involving the island have depended on acts of Congress — an institution where island residents have no vote.
In 1996, for instance, President Bill Clinton agreed to eliminate a tax loophole for U.S. corporations in Puerto Rico as part of a deal with Republicans in Congress to increase the federal minimum wage. The result was massive industrial flight from the island and increased borrowing by Puerto Rico to pay expenses.
Even now, Puerto Rico’s government needs permission from Congress just to allow some of its institutions to restructure their debts.
Unfortunately, Washington only pays attention to the island when the mainland is affected. The last time was back in 1999. Massive protests against military bombing practice on the Puerto Rican island of Vieques forced the Pentagon to close its military range there.
This time, Puerto Rico’s economic “death spiral” has reached Wall Street, which kept peddling debt to island leaders for years as investors gambled and made big returns.
But the money has run out. Both lenders and borrowers will have to sacrifice. And Washington needs to finally give Puerto Rico some freedom to solve its own problems.