While just about everyone is fixated on developments in Greece and the outcome of Sunday’s referendum, another little crisis is brewing away nicely on the other side of the Atlantic. Puerto Rico may be a few thousand miles away from Greece, but it is not a million miles away in terms of its economic woes. Even Paul Krugman took time to pen a brief article on Puerto Rico. So what is up on the sun drenched island?
Unsustainable debt is the short answer. According to the New York Times the state’s debt has ballooned because of a failing economy and an inefficient government that has taken in more that it has spent. Sounds a lot like Greece. Puerto Rico’s governor, Mr Garcia Padilla has declared that the state’s
$72bn debt is unpayable. Like Greece, Puerto Rico is now faced with further austerity. And in an further eerie parallel with Greece, the IMF has waded in with a call for debt relief. In the case of Puerto Rico this has come in the shape of a report issued by three former IMF and World Bank officials. They state quite categorically that even big spending cuts and tax increases will not fix the fundamental problem.
So, for both Greece and Puerto Rico a key element in any sustainable plan will include some debt relief and an extension of the pay back time for the rest of the debt. There is an added hurdle for Puerto Rico to overcome to get this part right. As a Commonwealth and not a fully paid up state of the US, Puerto Rico is not covered by the Federal bankruptcy law for municipalities and states. Basically this means that Puerto Rico cannot legally default! Action on this will need to be taken in Washington by Congress.
However there is no such thing as a free lunch. In exchange for debt relief, US commentators all seem to be in agreement that investors and Congress should press Puerto Rico to make significant regulatory reforms. Or, as the Economist likes to put it, many of the reforms needed to revive growth must be ordered from Washington.
With luck, both Puerto Rico and Greece can reach an agreement that is satisfactory to both sides, but in both cases it will involve some degree of continued austerity and almost certainly some economic changes that many will find difficult to accept. The alternative of a forced default is likely to prove even more unpalatable.
A couple of key differences in respect of the two crisis. Both Puerto Rico and Greece are part of a single currency zone. While many are using the Greek crisis as an opportunity to question the whole of the eurozone and its survival, nobody is doing this in relation to Puerto Rico. Whatever happens there, no-one is going to raise questions about the sustainability of the dollar zone. It also does not look like that anyone is calling for Puerto Rico to be expelled from the dollar zone either.
Another key difference is that Puerto Rico only has to deal with two political intermediaries – the President and Congress. Contrast that with Greece, which has to negotiate with the IMF, European Commission and all 18 other member states in the eurozone. While most commentators focus on Germany, all of the other 17 governments have their own concerns and electorates to worry about. Not to mention their own veto on any new deal with Greece. It should raise the question as to how Syriza has managed to alienate all of these partners?
Greece and Puerto Rico desperately need an agreed deal. I am not at all sure what outcome in Greece tomorrow is more likely to promote an agreement. One situation where I am glad I do not have a vote.