Puerto Rican Debt Crisis: Overview



Background: A History of Economic Exploitation

The history of Puerto Rico’s relationship with the mainland U.S. has been one of economic exploitation, plain and simple.

Prior to 1996, IRS Section 936 exempted U.S. corporations from federal taxes on income earned in Puerto Rico. In other words, Puerto Rico was a tax haven, and corporations seized on the opportunity. Their presence created thousands of jobs and undeniably benefited Puerto Ricans. The problem is, between 1996 to 2006, IRS 936 was phased out. No longer able to avoid taxation, corporations abandoned the island, thousands of jobs were lost, and the population shrank.

The government tried to issue bonds to make up for the shortfalls, but banks like Santander managed to find new ways of exploiting Puerto Rico, enriching themselves at the expense of the entire population. Puerto Rico’s Government Development Bank, under Carlos M. Garcia, created COFINA bonds, which redirected tax sales revenue to pay bondholders instead of funding vital public programs. Banks reaped huge financial rewards, while economic development was stalled due to growing debt and the lack of funds.

Bottom line: the banks undermined the Puerto Rican economy by underwriting predatory bonds and, when the government couldn’t pay them back, they started destroying the island’s infrastructure through vicious austerity measures.

If Puerto Rico could declare Chapter 9 bankruptcy like any U.S. municipality can (and like Detroit did back in 2013), they might be able to restructure the debt and society could start recovering. But because of a 1984 amendment, Puerto Rico cannot declare bankruptcy and consequently has no legal recourse to decide how its many creditors should get paid. To solve this problem, President Obama signed PROMESA into law in 2016, which stipulates that if the Puerto Rican government board cannot reach any settlements with bondholders, a judge is appointed and creditors are forced to accept a settlement (a “cram-down”). However, PROMESA does not promote long-term stability or address the structural issues at the heart of the crisis. It gives immense power to its financial-oversight board, which includes Carlos Garcia and José Ramon Gonzalez, two of the men who played an active role in precipitating this crisis.

Present-Day: A Humanitarian Crisis of Unprecedented Proportions

While banks demand more and more money from the victims of their manipulative financial “advice,” money that could be alleviating the suffering of Puerto Ricans is leaving the island. And the results are catastrophic.

Roughly 50% of Puerto Rican citizens live in poverty, with 37% of Puerto Rican children living in severe poverty. Hospitals have closed because of the lack of staff and unpaid utility bills. This is especially terrible given the fact that the Zika virus will wreck havoc on the island as the summer continues, as it has in the past. Since 2016 there have already been an estimated 40,000 cases of Zika, and that number is only going to increase.

Additionally, the quality of drinking water violates federal standards of safety. Contamination has led to various diseases, birth defects, cancers, and cognitive impairment. And without safe drinking water, what chance do people, already deprived of hospitals and other vital infrastructure and forced into poverty, have?

Finally, Puerto Rico’s education system is falling apart. More than 150 schools have closed and, over five years, 600 more will close as well. Those that remain have begun merging, making them difficult to access for poorer families. And these few still lack basic resources, including toilet paper. The dignity for Puerto Rican students has been sacrificed.

Going Forward

This situation is unacceptable and we can and must do something.

There are many ways individuals can support organizations, such as (insert University students stuff here). And if you can’t join an organization or go to an event, you can still help.  You can also check out these sources to learn even more about the causes and effects of this crisis.

But above all else, do something, because the choice is simple – are we going to help the banks who caused this crisis or people without clean water?

Puerto Rico is waiting for our answer.