Local Puerto Rican group urges PR’s creditors: No austerity

As Puerto Rico’s debt crisis worsens, investors holding the commonwealth’s bonds are positioned to call the shots, potentially prescribing tough austerity measures that some say could cripple the island’s public sector.

This week, a group of local activists, Puertorriquenos por Puerto Rico Massachusetts, is making an appeal to Roger Crandall, head of the parent company of one of the island’s major creditors, not to push for austerity measures.

OppenheimerFunds owns more of Puerto Rico’s bonds than any other mutual fund company. The firm is a subsidy of MassMutual Life Insurance Company, of which Crandall is the president, CEO and chair.

“We want to definitely bring to his [Crandall’s] attention to the fact that there are a number of very concerned Puerto Rican U.S. citizens in Massachusetts,” said Sandra Alvarado of PPR. “There are over 260,000 Puerto Rican citizens in Massachusetts alone. We want to bring him awareness of that fact and also alternatives [to austerity]. We want him to be flexible in terms of what the Puerto Rican community is asking for, and specifically Puerto Rico.”

Alvarado said that the austerity measures some bondholders are calling for include lowering minimum wage, closing schools and slashing Medicaid.

Crandall will speak at the Greater Boston Chamber of Commerce’s executive forum on September 10. When he does, PPR will send him an open letter that also will be shared with the press.

Many have left

Puerto Rico’s debt crisis has prompted mass emigration. Pew Research Center estimated that from July 2010-2013, 144,000 people left Puerto Rico for the mainland U.S.

“For the past four years, I knew that the situation was getting hard and life was getting very expensive and the quality of life was deteriorating very fast,” said Elsa Mosquera Sterenberg, director of the arts program for Inquilinos Boricuas en Acción who emigrated from Puerto Rico last August. “As my children and stepchildren started going out of Puerto Rico to study in the States and my husband had an opportunity to leave, I thought it was perfect for us to start a new life.”

One reason the cost of living is so high: the Jones Act of 1920, which requires that goods transported by sea between two points in the U.S. be carried on an American-built and -owned ship, with a mainly American crew. Puerto Rico relies heavily on marine transport of goods, yet is prohibited using foreign ships that might lower costs.

“In a globalized economy there should be no absolute reason why goods that should be transported to Puerto Rico could only be transported in U.S. ships and made in U.S. ships, except for the fact of exploitation,” said Pedro Reina, professor of Humanities and Arts and Cultural Management at the University of Puerto Rico. “It serves private interest. You have Puerto Ricans completely dependent on the U.S. maritime fleet, so it’s a monopoly.”

This outpouring of residents also reduces Puerto Rico’s tax base.

Crisis: a long time coming

“[The crisis] has been accumulating for the past 30 yrs. When I was leaving Puerto Rico it was 10 years people were saying that this was going to happen. People have been talking about it, but not one governor decided to change ways and to do things to make it better. … Everyone is responsible: governors from both parties — the party that wants statehood and the party that wants the government as it is now,” said Mosquera Sterenberg. The island has long been divided about whether to remain a territory, become a state, or petition for independence.

For many years, U.S. corporations and investors were drawn to Puerto Rico by a combination of incentives. Among these were triple tax breaks — exemptions from federal, state and local governments tax — on interest earned on bonds issued by the Puerto Rican government and a 1976 federal law granting U.S companies tax exemption on income originating from an American territory.

U.S. corporations came to dominate the economy.

In 2006, the federal government eliminated the tax exemption on income, prompting many corporations to withdraw. A recession followed.

To fill budget gaps, the Puerto Rican government borrowed. From 2000-2015, Puerto Rico’s debt increased from 63.2 percent of its GNP to 100.2 percent of its GNP, according to the Tax Foundation, a Washington, D.C.-based think tank.

“The Puerto Rican government’s overconfident approach to taking loans was the largest cause of the [current] crisis,” said Reina. “Everyone behaved as if money was endless. For the past three decades the government basically took out some many more loans than they could repay.”

Puerto Rico’s creditors

Puerto Rico’s debt measured $72 billion in June, when its governor declared the commonwealth could not repay. The majority of it is owned by hedge funds and bond mutual funds.

Many view the hedge funds that the commonwealth now says it cannot repay as more opportunists than naive victims.

“The bottom line in the current fiscal crisis has to do with the abuse of Wall St. and hedge fund managers that took advantage of a very dire situation that was present in the island. They were receiving triple tax breaks and so they jumped in, knowing full well that Puerto Rico’s economy was not doing very well,” said Alvarado.

“Puerto Ricans in the U.S. should pressure their elected representatives not to allow investors to simply put Puerto Rico through an austerity phase that could last 20 or 30 years just to satisfy the financial appetite, because they’re [the hedge funds] partially responsible for what’s going on,” said Reina. “They did not spend money ignorant of the fact that they were aiding an economy that was weak and could be preyed upon.”

“They [the hedge fund managers] were lending money to Puerto Rico knowing full well that Puerto Rico would not be able to pay,” he said.

Commonwealth status

Puerto Rico’s special commonwealth status restricts ability to react to the crisis.

It is part of the U.S. but has limited autonomy. Puerto Ricans cannot vote in presidential elections or elect a voting representative to Congress, which severely limits its ability to pass legislation aimed at improving its economic status. Because it is not a nation, it also cannot apply to the International Monetary Fund for assistance.

Bankruptcy

One impediment facing Puerto Rico as it seeks to resolve its debt crisis: federal law prohibits Puerto Rico’s cities and public corporations from declaring bankruptcy, a strategy employed by mainland cities such as Detroit. Thus it cannot suspend interest payments and work with creditors to hammer out a new debt repayment plan.

“The U.S. needs to pass a law to let Puerto Rico restructure the debt … and maybe have a future. Otherwise it [debt] will eat the Puerto Rican future,” said Mosquera Sterenberg.

It may also be the solution that offers creditors the most return on their investment.

“Puerto Rico’s economy is so crippled that what the government is doing is going to the loan holders and hedge funders and saying, ‘If you take me to court and cripple me even more, you get much less than if you sit down with me and negotiate,’” said Reina.

“The general U.S. population has a lot to lose if Puerto Rico goes under because 401k municipal funds hold Puerto Rican bonds,” said Alvarado.

Marco Rubio, Florida senator, has spoken against granting Puerto Rico the right to authorize municipal bankruptcies, while Jeb Bush and Hillary Clinton support it.

PREPA

With a verbal agreement last week, the Puerto Rico Electric Power Authority became the first Puerto Rican entity to make a deal with its creditors to restructure its debt. This raises hopes that other entities will be able to secure similar agreements. PREPA owes $8.6 billion.

The Ad Hoc Group, which includes mutual funds and hedge funds such as BlueMountain Capital and Knighthead Capital, owns about 35 percent of PREPA’s debt. They agreed to secure 85 percent of their existing claim and exchange the rest of their bonds for new ones.

OppenheimerFunds is among the creditors who support the agreement.

“We believe that the agreement, if implemented, will be a win for bondholders, PREPA and the people of Puerto Rico,” according to a statement posted September 2 on its website.

Should 75 percent of uninsured bondholders, excluding those in the Ad Hoc Group, also agree to the restructuring plan, PREPA is expected to save more than $700 million in interest payments and principal over the next five years.

PPR

In addition to the appeal to Crandall, PPR plans on continuing efforts to educate the general population in Boston and other cities with a large Puerto Rican presence about the island’s situation, said Alvarado.