Puerto Rico: America's
Greece or Detroit?
C O N T E N T S
* "Puerto Rico is America's Greece" By Cate Long, Reuters (March 8, 2012)
* "Is Puerto Rico the Greece of the Caribbean?" By Sergio M. Marxuach, Center for the New Economy (March 12, 2012)
* "The Latest @luisfortuno51 Twitter War: Puerto Rico and Greece" By Jos� Mart�, Latin Rebels (March 12, 2012)
* "Greek Americans: Which American states enjoy the biggest fiscal transfers?," Economist (July 30, 2011)
MuniLand
Puerto Rico is America's Greece
By Cate Long
Reuters (March 8, 2012)
On Tuesday, Puerto Rico increased the size of its general-obligation municipal bond sale to $1.7 billion from $1.4 billion, demonstrating the voracious appetite that tax-exempt investors have for higher-yielding bonds. Unlike the debt of the 50 states, Puerto Rico's municipal bonds are tax exempt for investors all over the U.S. This makes the debt especially attractive to wealthy investors in states with high personal income tax rates (think New York). But you have to wonder how many of these investors took the time to read the offering statement of the deal and run some numbers.
If they had done the math, they likely would not be buying maturities that come due too far into the future, because it's unlikely that Puerto Rico will be solvent enough to repay them.
Puerto Rico is a Caribbean island with a simple, local economy that was supercharged by tax breaks the U.S. Congress granted it to promote manufacturing. The Center for the New Economy described Puerto Rico's economy with a few quotes from Richard Weisskoff's book Factories and Food Stamps: The Puerto Rico Model of Development:
Puerto Rico was "the prototypical industrial colony, the archetypal case of the highest stage of development toward which many other Third World economies are moving. Its economy is open and dependent: open to both imports and exports; dependent on flows of foreign capital, government aid, and on the intangible methods, such as technology, consumption styles, and even wage levels for certain occupations."
[...]
In that kind of an economy, both production and consumption are dominated by the foreign sector. The production of goods for export is dependent on "imported capital, imported investment, imported raw materials, imported technology, and imported spare parts." Thus, most of the income derived from the manufacturing and sale of exports accrues to and is repatriated by absentee owners, with little impact on the local economy.
Puerto Rico could be described as America's own Third World country. It has a per capita income of $15,203 - that's less than half the level of the poorest state, Mississippi, where it's $31,046 - and the official unemployment rate is 15.5 percent. Forty-five percent of Puerto Ricans live below the poverty line, and 20 percent of personal income in the commonwealth comes from federal or Puerto Rican public funds. In short, it's an economy going nowhere.
But it's Puerto Rico's massive debt load that makes it resemble another crisis-stricken country that's been in the news lately: Greece. Although the commonwealth's debt load is only 89 percent of its GDP, Puerto Rico's underlying finances are weakening, and a big reason why it has balanced its budget so far is because it sold tax anticipation bonds and transferred the funds into the general fund. In 2011 public revenues were $8.17 billion while expenditures were $9.07 billion. This shortfall was plugged with official funds from the COFINA Stabilization Fund, a government subsidiary that sold bonds to be paid off with future sales tax revenues.
The other way that Puerto Rico has been seeking to close its deficit is by selling public assets to private investors. In September 2011, Goldman Sachs and Albertis paid the government $1.14 billion to lease two toll roads for a 40-year concession. In August 2011, Puerto Rico got bids from 12 international consortiums for the island's main transport hub, the Luiz Munoz Marin International Airport. There are plans afoot to privatize other public assets, including energy, public-school infrastructure, transportation and water assets. But these hard asset sales will only provide a one-shot infusion of cash to fill a budget hole. There is only so much family silver to sell.
Rating agencies placed Puerto Rico in the lowest tier of investment grade ratings: Moody's rated it Baa1 with a negative outlook, S&P rated it BBB and Fitch rated it at BBB+. It's not a giant concern to sophisticated investors if the rating slips into the junk category, but Puerto Rico's borrowing costs will shoot up if that happens. Then the more dire question arises of what the government will do once it runs out of funds to cover pensions, social welfare funds, government payroll and debt service. As happened with Greece, bond investors continue to buy the debt assuming at some point the government will be bailed out by somebody, somewhere. Good bond investors know how to do financial calculations better than anyone. The Wall Street Journal quoted one skeptical investor:
Some investors remained undecided early Tuesday afternoon.
"There are those people who won't touch [Puerto Rican debt] with a 10-foot pole, and those people who embrace it thinking, 'Hey, it's a commonwealth, the U.S. government won't let it go under,'" said Steven Schrager, director of research at SMC Fixed Income Management, which oversees $150 million worth of munis in separately managed accounts. "Well, I don't know about that, and I don't ever want to find out."
Caution, bond investors: There is no European Union standing ready to bail out Puerto Rico. If the U.S. Congress or Federal Reserve bailed out Puerto Rico, then they would have to bail out Illinois and California. And that is not going to happen.
CNE Blog
Is Puerto Rico the
Greece of the Caribbean?
By Sergio M. Marxuach
Center for the New Economy (March 12, 2012)
Recently, Cate Long, a reporter at Reuters stirred-up a hornet's nest by writing that Puerto Rico is America's Greece. Although any comparison between a sovereign country and a crumbling colonial backwater like Puerto Rico needs to be taken with a grain of salt, in general, Ms. Long post is on point.
There are, of course, some differences between Puerto Rico and Greece, but the similarities are simply overwhelming. Both have been running primary deficits for years; both have high debt ratios, Puerto Rico's debt to GNP ratio is close to 100%, and that is excluding unfunded pension liabilities, (in Puerto Rico GNP is a better yardstick of economic activity); and both suffer high unemployment, widespread corruption, and massive tax evasion.
At a more fundamental level, neither country has control of monetary policy, so neither can devalue its currency to jumpstart the economy; neither has a strong productive base it can bootstrap to ignite growth; and perhaps more important of all, both economies are economic mirages based on consumption that has been sustained by a monetary illusion, that is, by having access to a stronger currency than their fundamentals warrant. So, in my view, the fundamental similarities outweigh any superficial differences between both countries.
Ms. Long is also correct in that the U.S. will not bail us out. It didn't do it for New York City in the 1970 or for California in 2008/09.
Be that as it may, perhaps the best comparison is with Detroit. Puerto Rico is well on its way to becoming the Detroit of the Caribbean, a desolate, post-industrial wasteland, with massive poverty and a rapidly aging population.
Sergio M. Marxuach is Policy Director at the Center for the New Economy
The Latest @luisfortuno51
Twitter War: Puerto Rico and Greece
By Jos� Mart�
Latin Rebels (March 12, 2012)
The New Progressive Party (PNP) of Puerto Rico, who is actively campaign for incumbent pro-statehood and Republican Governor Luis Fortu�o, has taken issue with a Reuters story called Puerto Rico is America's Greece. The article, written by Reuters contributor Cate Long, dives deep into the island's economic woes and compares Puerto Rico's situation to that of Greece's. Such information has been available for the last few months, as a recent economic report revealed in December, 2011. This is just part of what Long writes:
But it's Puerto Rico's massive debt load that makes it resemble another crisis-stricken country that's been in the news lately: Greece. Although the commonwealth's debt load is only 89 percent of its GDP, Puerto Rico's underlying finances are weakening, and a big reason why it has balanced its budget so far is because it sold tax anticipation bonds and transferred the funds into the general fund. In 2011 public revenues were $8.17 billion while expenditures were $9.07 billion. This shortfall was plugged with official funds from the COFINA Stabilization Fund, a government subsidiary that sold bonds to be paid off with future sales tax revenues.
So what does the PNP do? Post an image on Facebook and they go on Twitter to call Long an "activist of Occupy Wall Street." So, when in doubt, personally attack a reporter. That won't play well, will it?
Granted we could be snarky and ask the PNP to actually edit their spelling errors in Spanish (Espana, pais), but we won't. However, we do find it laughable and sad that a 15.2% unemployment rate is being seen as "good news" for the island. In addition, the chart also confirms that Puerto Rico's credit rating is pretty low as well. Finally, the chart does nothing to combat the original findings of the December report, which we will share here:
Two Drops of Water
According to the firm [WSC], there are many similarities between Puerto Rico and Greece, Italy, and Spain, which the report describes as "weak European economies, among them: insolvent pension plans, high unemployment, and poor management in the collection of revenues into the treasury.
Of all the similarities, however, the debt level would be the most alarming indicator, according to the report. WSC estimated that is one were to divided the central government debt by the population of the island, every Puerto Rican owes about $ 7,837. Meanwhile, the island's per capita income would be at about $ 13.675. Percentage-wise speaking, this means a debt ratio of 57.3% to income.
If the calculation considers other $ 28 billion of debt issued by public corporations and municipalities, each Puerto Rico would owe about $ 17, 265 in debt.
As Indebted as Portugal
"(The figure) aligns more with Portugal, near to that of Spain, and well above the lowest per capita income in Puerto Rico," said WSC.
The per capita debt of Portugal, as WSC states, is about $ 16,402. In Spain it is estimated to be $ 17,539.
However, this indicator in states like New Jersey would be about $ 3,669, in Hawaii it would be around $ 3,996 and in Connecticut, the debt per capita would be in the vicinity of $ 4,859. Percentage-wise speaking, the debt of these states in proportion to income per capita would be 7.2%, 9.6% and 8.8%, respectively.
The firm estimates would be higher if one considers that WSC did their numbers based on a total debt of around $ 64 billion
On November 20, El Nuevo D�a outlined that public debt was about $ 65.5 billion.
That figure, as a proportion of Gross National Product (GNP) could be equal or exceed the size of the local economy. This means that the debt of the Island in relation to GNP, could range between 92% and 100% or more, something that the research identifies as a serious economic burden for the development of any society.
Poor Reputation
"Despite having a conservative governor in fiscal terms, the history of Puerto Rico is tainted by cronyism and irresponsible fiscal decisions," the firm said.
He added that unless the debt is reduced or the island's economy
grows faster than debt, Puerto Rico is aimed at a "critical moment" for its finances before the end of this decade. At this juncture, in light of fiscal conservatism "rampant" in the federal capital, it would be "unlikely" that the US Congress would help the island. So, if the situation does not improve "materially and fast," the island would be in serious trouble and the U.S. municipal debt market may face "a significant credit hurdle," said WSC. Puerto Rico's debt has grown at a rate of 9% annually in recent times. Meanwhile, the Puerto Rican economy has shrunk almost 12% since the start of the recession.
The BGF Refutes Findings
"It is clear that we have to keep working," Batlle said when asked about the report.
"In 2009, we indeed were on the path to being Greece," admitted the banker. "But we have succeeded in keeping Puerto Rico from falling off the cliff," Batlle said, referring to the period when the island lost access to capital markets by the growing fear of degradation.
Batlle preferred to emphasize that the report acknowledges the progress of the fiscal reforms that the Fortu�o administration has implemented. In response to questions about the possibility of restructuring the island's debt, Batlle said it will not be necessary if they continue to apply that fiscal discipline measures have already been implemented.
Here is a Storify of the latest tweets.
The Luis Fortu�o Campaign's
Twitter War With Reuters
A story of politiquer�a at its worst
RT @cate_long: governor of Puerto Rico is attacking me now over my piece "Puerto Rico is America's Greece" reut.rs/y3wLQK
Ya quisiera Grecia ser Puerto Rico. facebook.com/photo.php?pid... @PRSecState @pnp_pr @luisfortuno51 @pedropierluisi
Alerta Progresista
a day ago
RT @aprogresista: YA QUISIERA GRECIA SER PUERTO RICO La prensa puertorrique�a vende a Cate Long, activista de Occupy Wall Street,... fb.me/1k9yTsnzf
PNP
2 days ago
RT @PeteValle: @ABWashBureau @cate_long As a Puerto Rican, I apolpgize for such behavior from our elected officials. The article is 100% accurate, imo.
Cate Long
a day ago
@cate_long don't ever listen to republicans on the campaign trail (e.g. Fortu�o)
Dry Rivers
a day ago
May I quote you in my next blog post? Thanks! RT @GersonBorrero: .@cate_long .@luisfortuno51 Can't handle the truth.
Cate Long
2 days ago
YA QUISIERA GRECIA SER PUERTO RICO La prensa puertorrique�a vende a Cate Long, activista de Occupy Wall Street,... fb.me/1k9yTsnzf
Alerta Progresista
2 days ago
@cate_long PR is worse than Greece!! @luisfortuno51 is making his friends richer and nothing for the people!! Ask around to find out
B0ricva
a day ago
@cate_long @luisfortuno51 Absolutely. And I invite you to be on my program .@notiluz tomorrow to talk about your article.
Gerson Borrero
a day ago
RT @Idelisa1: @luisfortuno51 es una verguenza que nos digan no pueden entrar pues no habra pupitres ni materiales para estos estudiantes, resuelva esto .
Think Puerto Rico
2 days ago
RT @Idelisa1: @luisfortuno51 es una verguenza que nos digan no pueden entrar pues no habra pupitres ni materiales para estos estudiantes, resuelva esto .
Think Puerto Rico
2 days ago
RT @GersonBorrero: .@cate_long .@luisfortuno51 Can't handle the truth.
Think Puerto Rico
a day ago
@luisfortuno51 RT @ABWashBureau: When you have to attack areporter personally, as theGov of PR does,you are losing the fight. End of story.
B0ricva
a day ago
@cate_long you said the #truth of what is going on here
Think Puerto Rico
2 days ago
RT @aprogresista: YA QUISIERA GRECIA SER PUERTO RICO La prensa puertorrique�a vende a Cate Long, activista de Occupy Wall Street,... fb.me/1k9yTsnzf
Zoraida Castellon
2 days ago
RT @ABWashBureau: Gov of Puerto Rico is really going after @cate_long. My Spanish is rusty, but even I can see they aren't mincing words: alertaprogresista.com/node...
Leovigildo G�mez-Geo
2 days ago
RT @aprogresista: YA QUISIERA GRECIA SER PUERTO RICO La prensa puertorrique�a vende a Cate Long, activista de Occupy Wall Street,... fb.me/1k9yTsnzf
America's fiscal union
Greek Americans
Which American states enjoy the biggest fiscal transfers?
Economist (July 30, 2011)
IN MAKING their latest deal to save the euro on July 21st, the 17 members of the single currency took another small step towards a fiscal union. America made that leap 220 years ago, when the new federal government took on the debts incurred by individual states in their revolutionary war against Britain. That debt, wrote Alexander Hamilton, America's greatest treasury secretary, was "the price of liberty".
Ever since, federal debt has been backed by the full faith and credit of the entire United States (state debts are a different matter). America's good credit has survived war and depression. It is holding up even as Republicans in America's House of Representatives threaten not to increase the congressional limit on federal borrowing. That would force the government to choose between paying its bondholders and its pensioners. If the ceiling does not rise, the roof may fall.
Europe still has a long way to go before it is as fiscally united as America. It could not contemplate anything like the transfers that America's federal system allows. Take Virginia, for example. In 2009, according to the Census Bureau, the federal government spent $155.6 billion in this state where the revolutionary war was won. But the Internal Revenue Service collected only $58.6 billion in federal taxes. Virginia, in effect, ran a deficit of $97 billion. Indeed over the 20 years from 1990 to 2009, according to calculations by The Economist, it ran a cumulative deficit of over $590 billion.
That amounts to about 145% of Virginia's 2009 economic output, similar to the debt-to-GDP ratio of Greece. If America were like the euro area, Virginia would have to bear the burden itself. But as part of a fiscal union, it can rely on others to help.
Virginia is not however the most "indebted" of America's states, according to these calculations (see chart-->). That honour falls to New Mexico, which has a 20-year deficit worth over 260% of its GDP. Puerto Rico, which is a territory, rather than a full state, has an even bigger debt ratio.
Twenty American states have paid more in federal taxes than they have received in federal spending. The biggest "creditor", relative to the size of its economy, is Delaware, which has a 20-year surplus of almost $125 billion, more than twice its GDP. Its contribution is perhaps flattered by the taxes paid by the many firms incorporated in the state. Ironically, creditor states have also elected the three Democrats most involved in trying to raise the debt ceiling: Harry Reid, a senator from Nevada, Nancy Pelosi, a congresswoman from California, and Barack Obama, once a senator from Illinois.
These transfers are already far bigger than anything the Europeans could match, but the figures actually understate matters. For example, they exclude any interest payments on federal debt, which add up to over $4 trillion since 1990. If those payments were made by debtor states in proportion to their cumulative deficits, the debts of states like New Mexico and Mississippi would rise to over 500% of GDP.
Debtor states enjoy enormous fiscal transfers, backed by taxes raised elsewhere and bonds the whole union must repay. That commitment to repay has never been questioned. Even now bondholders remain remarkably sanguine about the risk of default. But the political impasse may have done more subtle damage. When the national debt is "an object of established confidence", Hamilton argued, "it answers most of the purposes of money." Money-market funds have recently been busy swapping Treasuries, especially one-month bills, for cash. More than 220 years after Hamilton made his case for a fiscal union, America's national debt no longer answers all of the purposes of money.
