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Puerto Rico Officially Defaults on Its Debt

Monday May 2nd, 2016   •   Posted by Craig Eyermann at 5:50am PDT   •  

US-bankruptcy-court-puerto-rico-seal The shell game is officially over – today, the U.S. commonwealth government of Puerto Rico will default on making $442 million in payments to its creditors. USA Today reports the news:

Puerto Rico Gov. Alejandro García Padilla said Sunday afternoon in a televised address that he had ordered the island’s Government Development Bank not to make certain payments owed Monday, stacking another round of missed payments on multiple previous defaults.

“This was a painful decision. We would have preferred to have had a legal framework to restructure our debts in an orderly manner,” García Padilla said. “But faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice. I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”

Puerto Rico was expected to default on about $422 million in bonds Monday, plunging the U.S. territory deeper into arrears, Moody’s Investor Service said last week in a report.

The article goes on to summarize the current debate in the U.S. Congress on how to address the issue:

Generally, Republicans are opposing anything that sniffs of a bailout without concessions on pensions, while Democrats are pressing for greater protections for unions.

Last week, Washington Post columnist George Will described the positions being taken by the opposing sides in that legislative debate.

Puerto Rico’s approximately 18 debt-issuing entities have debts — approximately $72 billion — they cannot repay. The Government Development Bank might miss a $422 million payment due in May, and the central government might miss a $2 billion payment in July. Congress will not enact a “bailout,” meaning an infusion of U.S. taxpayers’ money.

But some Democrats — perhaps anticipating a day of reckoning for their one-party state of Illinois, and nurturing their indissoluble marriage to government employee unions, some of which have helped reduce Puerto Rico to prostration — want to reward the San Juan government’s self-indulgence. They favor pouring more Medicare, Medicaid and other benefits into the island. They also favor giving protection of unionized government employees’ pensions priority over payments even to holders of general obligation bonds guaranteed by the territory’s constitution. Although Puerto Rico’s per capita income ($11,331) is about half that of the poorest state (Mississippi, $20,956), Democrats oppose allowing Puerto Rico to lower the hourly minimum wage. A full-time job at the U.S. minimum, $7.25, which applies to the island, is two-thirds of the average islander’s wage, which increases unemployment and hence immigration to the mainland. Some Democrats even want the earned-income tax credit and child tax credits paid to Puerto Ricans even though they do not file personal federal income tax returns.

Sen. Orrin Hatch (R-Utah) may also have his eye on Illinois and other states subjugated by the axis of the Democratic Party and government employee unions. He wants legislation for Puerto Rico to require U.S. state and local governments, almost 60 percent of which last year failed to make full pension contributions, to honestly state their pension liabilities. Puerto Rico has a $44 billion unfunded pension liability.

In these debates, it is important to remember that what is happening in Puerto Rico today is the result of the previous actions of the politicians and bureaucrats who have allowed Puerto Rico’s solvency problems to escalate to the level they have. Everybody has known this day was coming for a long time. The tragedy is that the people in charge all these years never seriously prioritized instituting the reforms that could have averted the growing crisis that they instead kept trying to put off just a little farther into the future.

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May 2016