Austerity Natural Disaster

Over the last twenty years, international stakeholders have come together in an impressive show of political consensus to provide debt forgiveness to poverty stricken countries through the introduction of programs like the Multilateral Debt Relief Initiative and the Heavily Indebted Poor Countries Initiative. Eligible countries, often affected by war, famine, or natural disasters, have been able to get complete write-offs of their external debt, as well as access to development loans at sustainable rates of interest. Most crucially, these countries have seen their gross domestic product rise after decisive debt relief. Puerto Ricans should get a similar deal.

Why we should push for debt forgiveness for Puerto Rico

Hurricane María, making landfall as a Category 4 storm when it devastated Puerto Rico last week, was bound to wreak significant damage simply by virtue of its destructive power. Any state affected by a disaster of this scale would have a hard time recovering.

But there is a reason why—unlike Texas—most of Puerto Rico’s population will lack running water for weeks, and power service for months. There is a reason why the government itself is begging for donations through a public-private partnership it established in the aftermath of the hurricane. There is a reason why this is no ordinary process of disaster management, but a full-scale, ongoing human tragedy, the likes of which the United States has not seen since Katrina. That reason isn’t María, but Puerto Rico’s acute fiscal and economic crisis, and the corresponding austerity policies that left it woefully vulnerable in the face of a natural disaster.

Since 2006, the small Caribbean archipelago has been mired in an economic crisis. Having lost crucial federal tax incentives for manufacturing companies to operate in Puerto Rico and affected by an increasing number of American trade deals with regional neighbors, any competitive advantage it held in commerce with the mainland United States was decimated. The global financial crisis of 2008 did not help, and in 2010, three of Puerto Rico’s major banks failed. Two more would follow by 2015. Successive administrations issued bonds to cover operating deficits in the face of decreasing tax revenues. In tandem, they took the small government philosophy to heart, starting with a 2009 law that laid off thirty thousand government employees. The private sector could not make up for such dramatic job losses. As a result, the public debt bill ballooned while the economy was in freefall.

By 2014, the territory’s public debt had grown to $73 billion, even before factoring in other contractual obligations like pension payments and monies owed to suppliers and contractors. All the while, Puerto Rico’s colonial political status affected its leaders’ ability to take meaningful action to restructure the debt burden. Federal law did not allow the territory to enter into bankruptcy, and precluded the local government from crafting its own law to address the problem.

Unmoved to action for years, Congress finally decided to do something––and grossly missed the mark in doing so. In June of 2016, President Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA for short. The law imposed a Faustian bargain. It provided access to bankruptcy courts for territorial entities, with one small condition: the establishment of an unelected Fiscal Control Board, or Junta, that would implement austerity policies to guarantee a certain level of payments to bondholders. Appointed by a President Puerto Ricans did not elect and a Congress where the territory has no voting representatives, some of the Junta’s members had questionable involvements in the debt crisis, either as government officials in charge of bond issuances, or having worked in financial firms that underwrote or marketed the bonds.

The Junta lost no time in fashioning their recipe for “fiscal responsibility.” According to the Junta’s own numbers, its initial, draconian policy demands would have reduced Puerto Rico’s gross national product by 16 percent in their first year of implementation, turning the territory’s deep recession into a full-scale depression. After months of negotiation with the local government, the Junta certified a multi-year fiscal plan in March that it estimated would reduce Puerto Rico’s gross national product by 3.9 percent in fiscal year 2018, and by 3.3 percent the following fiscal year. That is to say, the federal entity charged with turning around Puerto Rico’s finances actually approved a plan that would make Puerto Rico’s economy worse.

Today those dismal economic projections would seem hopeful. Preliminary estimates for losses only to insured property due to Hurricane María range from $34 billion to $72 billion, and only about half of the residential properties in Puerto Rico are insured. A mass exodus in the wake of María is also likely, as economically choked Puerto Ricans join the steady stream of emigration to the mainland United States that has seen the population decrease by 9 percent from 2000 to 2015. The austerity measures included in the fiscal plan, from cuts to health services and public education to monthly furloughs for most government employees, will continue to make life unbearable for the diminished number of Puerto Ricans who stay.

Needless to say, the spending cuts outlined by the Junta will cripple the government’s ability to coordinate and invest in the sort of long-term recovery that Hurricane María makes necessary. The island-wide electric transmission and distribution system needs to be rebuilt literally from the ground up. Roads need to be repaved and bridges reinforced to restore normal access to certain rural towns. Many businesses, especially small to medium enterprises that lack generators, will be unable to operate for an extended period of time. That means that the state has to brace for a sharp reduction in sales tax revenues. Austerity measures designed to satisfy creditors are incompatible with hurricane relief. Effective hurricane relief must include a respite from austerity for Puerto Rico to stand up again.

This is not a new idea. Over the last twenty years, international stakeholders have come together in an impressive show of political consensus to provide debt forgiveness to poverty stricken countries through the introduction of programs like the Multilateral Debt Relief Initiative and the Heavily Indebted Poor Countries Initiative. Eligible countries, often affected by war, famine, or natural disasters, have been able to get complete write-offs of their external debt, as well as access to development loans at sustainable rates of interest. Most crucially, these countries have seen their gross domestic product rise after decisive debt relief. Puerto Ricans should get a similar deal.

There is no space for new investment in crucial infrastructure, and there won’t be any until there is certainty that Puerto Rico will receive a significant debt write-off, which is not immediately achievable through a drawn-out bankruptcy process. In the short term, the Junta should take action to amend its certified fiscal plan to divert any public revenues deposited in a cash reserve for bondholders to be used for the immediate needs of the Puerto Rican people. Further down, Congress should derogate PROMESA and substitute it with a debt forgiveness program for Puerto Rico that includes a clear poverty reduction and economic growth strategy, demanding in return total transparency by the Puerto Rican government during the implementation stage. Debt forgiveness should be coupled with a loan guarantee by the Treasury Department, in order to reenter the credit markets at the most favorable rate possible.

While bondholders lobbying in Congress would rail against any such proposal, the Puerto Rican diaspora has increasing political clout in key states. It should organize to raise the issue and make congressmen and congresswomen realize that they approved a law that was designed to fail from the outset. Given Puerto Rico’s slow-motion economic train wreck over the last two decades, and the inadequate policies implemented to address it, debt forgiveness was already a necessity. In the aftermath of María, it becomes a moral imperative. None of this would cost the American taxpayer a single dollar, and yet it is one of the most important things the United States can do to help its territory recover from this disaster. No amount of food or water will help Puerto Rico recover if it is dragged down by the burden of crushing debt—though without food and water (and shelter and immediate infrastructural support), Puerto Rico’s prospects are dimmer still. Time is not on our side. Let’s make it count.

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