From CNBC: “In default, Puerto Rico faces ongoing fiscal pain.”
Like a homeowner with too big a mortgage, Puerto Rico has finally started falling behind on its payments.
And it doesn’t look like there’s an easy way to refinance its huge pile of debt to make it more affordable.
Gov. Alejandro Garcia Padilla announced Wednesday that the Caribbean island territory will be able to make most — but not all — of the nearly $1 billion in interest payments due Jan. 4. He told reporters he plans to meet with bondholders in early January.
The down-to-the-wire negotiations over just which bondholders will get paid centered on a haphazard juggling act that saw the commonwealth shuffling funds from one account to another to pay its debts.
The details aren’t spelled out but I suspect that what this means is that they’re trying to pay interest on borrowed money with other borrowed money. This means someone is left unpaid, and the story suggests Puerto Rico’s creditors will sue.
There is no resolution in sight.
The story brings up an aspect of what happened that is well worth remembering in an era where Bernie Sanders is popular.
All state and local government finances got hammered by the Great Recession. But most of the 50 states have seen their revenues recover and their local economies have bounced back as more taxpayers returned to work.
Puerto Rico’s economy, though, continues to struggle, the result in part of the elimination in 2006 of a favorable tax break for U.S. companies that sent many of them packing. Since then, a long-running recession has sparked an exodus of companies and skilled workers.
Get that? Ending “tax breaks for the rich” had disastrous consequences for the Puerto Rican economy and workforce.
Of course, rather than adjust to new economic realities, Puerto Rico went on a massive borrowing spree.
Now, because they borrowed instead of cutting government services, they are likely to cut government services in order to pay interest.