The United States’ Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) bill last Wednesday. The North American central government is looking for a way to give Puerto Rico more time to pay and ultimately avoid another default. The president himself appointed a control board, and he vowed to fast-track the procedures which are necessary because the next payment deadline is on July 1.
The situation is not new, and the government has been working its way around on how to help the U.S. territory to solve its financial condition. The idea of creating a commission to assess, control and look for a way out is not new either, but the first time it was proposed, a lot of politicians, mostly Republican, attacked the idea by saying it was a bailout. They even used TV ads to tell the people in North America the government wanted to make them pay for Puerto Rico’s debt which was obviously not true.
PROMESA’s ultimate goal is to restructure the island’s financial system
PROMESA is going to establish a board formed by financial experts. These group is going to work in close collaboration with the government on the island, and it is going to be the middle man in the negotiation with the debt collectors. There are a lot of companies that want to collect the money the country owns them as soon as possible due to the existing financial uncertainty. However, the government of the United States hopes that the participation of an American commission will make the directors of these organizations reconsider things and look for a new agreement.
The strategy is to buy more time for Puerto Rico. On July 1, the government of the island is obligated to pay part of its $1.9 billion worth debt, and it simply can’t. Which means, the country is about to declare “default” for the fourth time since last year. To avoid this, the government is looking for a way to give Puerto Rican authorities more time to pay, and the plan is very simple.
The Commission is presenting the lenders the opportunity of a bigger financial return in the long run, instead of a quick buck by increasing the gain over the debt and postponing the deadline. In basic terms, the board is telling the lenders Puerto Rico is going to pay more money if they give it more time. The solution is not partial, the objective of PROMESA is helping the government in the island to restructure its financial system, and thus, becoming financially independent.
Puerto Rico used to be a financial paradise
The Commonwealth of Puerto Rico has always been advertised as a haven location for great vacations, and back in the 80s, it was also advertised as a fiscal heaven. To attract investors, the government in the country severely lowered the taxes applied to manufacturing facilities regardless nature. Consequently, hundreds of companies moved their operations there because it was very cheap, and the island is only 130 miles from the mainland which means that transportation is not a problem.
As a result, the economy in the country flourished. The sheer amount of manufacturing facilities created thousands of job opportunities for the people in the area. Investors were also motivated to fund recreational centers and education centers to improve their local personnel further. During this time, the country was also Americans most favorite vacation destination.
No official can explain why they changed the law
This all came to an end in 2006 when a small amendment in a big unrelated bill stopped Puerto Rico’s primary income source. The change in legislation made the reduction of production tax in the island completely illegal which immediately raised the cost of output in the Isle. For many companies, having operations in the country became unprofitable, and they decided to leave. As a result, 50 percent of the industry in the country died which translates into a lot of unemployment. Furthermore, the local government took on some big loans to try and cover this deficit hoping for the situation to change for better, but that never happened.
When the U.S. recession hit in 2008, Puerto Rico had the worst of it. To deal with the crisis, Puerto Rican government started to sell bonds triple tax-free. The move intended to attract individual investors such as companies and magnates. Triple tax-free means the owners of the bonds did not have to pay taxes when cashing them, not even federal taxes. In spite of the temporal relieve it provided, this is now taking a huge toll on the economy of the country.
Bonds are basically a promise of payment. When people buy bonds, they expect the value of the document increases over the years, so they can cash it out later for more money than they initially invested. In other words, the Puerto Rican government strengthened its debt in a radical way.
To further attract investors and give peace of mind to the ones they already owned money, Puerto Rican officials did some changes to the country’s constitution. For instance, one little amendment says that the state is obligated to make the payment of loans a top priority, even on top of essential services, and the civilians feeling the consequences. The budget that the country usually spends in maintaining the necessary services in the island has been diverted into paying the loan, so for example, hospitals have had their power cut off, and public education programs have been shut down among many other things. The situation is not new, and even John Oliver, the host of Last Week Tonight, addressed the situation in one of his videos back in April.
Hopefully, the commission formed by PROMESA will help the island recover its old glory and lead to many other reforms to improve the living conditions in the country.