Financial Half-Truths in Puerto Rico
A Moment of “Half-Way” Honesty About Puerto Rico in the Financial Press
Last week in Barron’s, the journalist Andrew Bary, shows a rare example of honesty, even if only “half-way” honesty, in assessing the economic situation in Puerto Rico, the oldest U.S. colony. In an article entitled, “Troubling Winds”i, Bary warns of the dangers in the current investment climate in Puerto Rico, especially for municipal bonds, while reminding all of the failure of U.S. capitalism in its colony despite his unwillingness, as well as that of the analysts he cites, to make this very obvious connection. Such is the myopia so typical among the acolytes of capitalism.
However, the reasons behind this blatant warning to investors come as no surprise, especially for people struggling to survive under conditions of decaying capitalism in the colonial world. The picture painted by the author is painfully familiar:
“The economy has been in recession since 2006, the unemployment rate is 13.2%, and the budget has been structurally imbalanced for nearly a decade. The poverty rate is high, government employment accounts for a quarter of all jobs, and transfer payments make up 40% of income. More than a quarter of Puerto Rico’s nearly four million residents receive food stamps.”
Needless to say, these figures, which in the case of the unemployment numbers represent a gross underestimate due to statistical manipulations commonly used by official sources, do not speak of the negative social impact, from the collective anxiety to the perverse self-destructive tendencies, so prevalent in colonial society.
The Amount and Character of Public Debt in Puerto Rico
According to the article cited, Puerto Rico has a total public debt of $70 billion, $53 billion of which is tax-supported, i.e. is paid with taxes collected, from a dozen government agencies that have issued bonds. This amount places Puerto Rico third, behind California and New York, with respect to total debt held by US “states.” However, the burden of Puerto Rican debt in relation to measures such as gross domestic product (GDP), personal income and population results in a per capita debt of $14,000, or ten times the average of the 50 states.
The central government, the Corporation for Financing through Sales Taxes (COFINA in Spanish), the Water and Sewer Authority (AAA), the Highway and Transportation Authority (ACT – DTOP), and the Electric Power Authority (PREPA) are among the government agencies that have accumulated the most debt. The AAA bonds have already been rated junk and all others, with the exception of COFINA, are considered only one level above junk (Triple B-) in terms of investment grade.
From the point of view of the capitalists, the 7% yield that currently characterizes investment in Puerto Rican bonds, and which exceeds what is considered an investment in quality municipal bonds by two percentage points, indicates an erosion of trust investors. From the point of view of the masses of workers, this represents an “open season” to extract from the population a number of additional taxes and fees while cutting basic services and continuing the campaign of mass layoffs in the public sector, notwithstanding campaign promises to the contrary, all with the purpose of transferring increasing amounts of public funds to finance capital.
Among the financial houses with the largest share of Puerto Rican bonds are Oppenheimer Funds and Franklin Templeton. Virtually all of their mutual Funds contain Puerto Rican bonds.
This begs the question, with such a negative panorama, why would anyone but the riskiest investor even consider Puerto Rican bonds in the first place? The Barron’s article highlights an important detail, explaining that “the interest payments on the majority of Puerto Rico bonds are exempt from state and local taxes in all 50 states” resulting in a “triple tax exemption – federal, state, and local.” This, which is rare in the municipal bond market, is an attraction for investors in high tax states.
To this we add another important detail. About $ 9 billion of Puerto Rico’s debt carries insurance. Although this represents a small percentage, especially when compared to cases like Detroit, a large part of this is in the form of sophisticated financial instruments called interest rate “swaps”. On a previous occasion, informed by the insights of Ellen Brown,ii we noted how these “swaps”, which tie fixed-rate bonds to variable interest rate debt, had been exposed as schemes orchestrated by banks, credit rating agencies and the now discredited LIBOR index to extract additional payments over the principle and interest on loans taken by municipalities and other governmental entities. In order to continue drawing on bond markets, the colonial government will have no choice but to buy more insurance in the form of “swaps”, which will lead to greater outflows to finance capital.
A Bag of Solutions or a Bag of Tricks?
In response to this situation, the colonial government has resorted to a strategy predicated on the all too familiar demands of finance capital. Could it be otherwise? Under conditions of decaying capitalism in which a colonial state sheds all pretenses in showing its true class character class, it would appear not.
The solutions proposed by the current colonial government are tantamount to the same familiar austerity measures, of which the acolytes of financial capital sing so many praises, while provoking workers worldwide to take the streets: increases in taxes and fees, cuts in services, and reversals of historical conquests of the working people to achieve a better quality of life.
For example, the latest government colonial budget includes $1.4 billion in new taxes, not including a proposed new tax of 15 cents per gallon of gasoline that has been postponed for the time being due to the ire of local businesses interests. The colonial government anticipates that a new Patente tax, nominally on businesses only, will generate $439 million per year. No one with an inkling of common sense can doubt that the additional costs will be passed on to consumers. The plan also includes $270 million to be generated by ending corporate tax exemptions for some businesses, which would mean an increase in the corporate tax rate to 1994 levels after having been reduced by 30% in 2011. Yet, this borders on the ridiculous when one considers that in 1994 tax exemptions under IRS Code 936iii were still in force. The ridiculous becomes absurd considering that the colonial government expects a proposed new tax on cigarettes to generate $334 million. In other words, they want to impose $60 million more in taxes on smokers than on large companies, undoubtedly out of concern for the health of everyone!
The conclusion: after years of colonial policies based on corporate tax breaks, we now have corporate tax rates at the very same level as before along with a series of new taxes that will be passed on to consumers.
The crown jewel of the colonial budget plan was the “overhaul” of the pension system. After warnings from Wall Street that the credit rating of the island would be reduced to junk, the colonial government, with its bourgeois courts as accomplices, started a campaign to wrest from the working class its historical conquests in an unprecedented act of struggle class. The so-called reforms include increasing the retirement age, raising contributions from public employees by 2%, as well as a reduction in pensions and benefits for many retirees. The biggest change, however, includes a forced switch to a “hybrid” scheme or “defined contribution” from the previous defined benefit plan.
With the pretext of an unfunded liability of $37 billion and a public relations campaign cleverly coordinated with credit rating agencies like Moody’s, S & P, and Fitch, the colonial government moved aggressively to fulfill its role as an agent of finance capital. This role could be no other than to coordinate the looting of the pensions of thousands of public employees who now see the largest financial houses play their savings on a market that seems more like a Condado Beachiv casino while charging exorbitant fees. As is known, the colonial government’s move was unsuccessfully challenged in court, where a 5-4 decision upheld the Law 3. Despite all of this, Wall Street is already treating Puerto Rican debt as junk, as evidenced by the 7% yield referred to above.
The final prong of the colonial government’s strategy is to increase the fees and rates on everything it can. Increases in electricity rates, which are already three times more expensive than the U.S. average, as well as transportation directly impact everyone. Further increases, even in the form of “indirect” hikes, will surely be passed on to the most vulnerable.
This picture casts a dark cloud over all economic forecasts. It appears that the acolytes of American capitalism in the colony have painted themselves into a corner from which there is little hope of escape. If the analysis of Puerto Rico’s economic reality in the latest edition of Barron’s has left the defenders of colonialism on the island scrambling to give a credible answer, their proposed solutions should leave workers without any illusions.
At the end of this provocative article, the author, Andrew Bary, urges investors to question whether the colonial government “will continue to have the political will to impose painful measures on relatively poor Puerto Rican residents to service debt held mostly by affluent Americans.”
Revolutionary workers also urge. They urge an end to capitalism and all the political machinery that sustains it in Puerto Rico. They urge working class forces with revolutionary consciousness to organize and impose painful measures on the relatively few rich who benefit from this system at the expense of the majority.
Carlos Borrero is a New York based writer.
[i] Bary,Andrew (2013) Barron’s, Troubling winds (August24)
[ii] Brown,Ellen (2013) CounterPunch.org, Fleecingpensioners to save banks http://www.counterpunch.org/
Also see: Detroit: ¿Otro llamado a lostrabajadores? inAbayardeRojo Online.
[iii]Section936 under the IRS code served as the framework for corporate taxholidays for US companies operating in Puerto Rico for decades until 1996.
[iv]This is a tourist section famous for fancy hotels and casinos located in SanJuan, PR.