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The debt crisis in America’s own back yard

  • Author:naky
  • Source:www.diecastingpartsupplier.com
  • Release on:2015-07-15
There is never a perfect time to announce you are virtually bankrupt. For Puerto Rico, however, this week was a better moment than most. On Sunday, the island’s government released a long-planned economic report written by Anne Krueger, a former World Bank chief economist, which declared that the territory was in fiscal crisis. As governor Alejandro García Padilla put it, the island’s $72bn debts are now “not payable”.

But instead of sowing widespread fear, debt prices only wobbled. For with Greece in full-blown financial crisis, and the Chinese markets tumbling, Puerto Rico’s revelation seems almost a sideshow. Nevertheless, it would be a mistake to ignore what is happening in Puerto Rico. For Professor Krueger’s report highlights two important points. First, Greece is not the only place grappling with excess debt, poor governance and opaque finances. Second, America, like Europe, badly needs to become more imaginative — and practical — in dealing with excess public sector debt.

For the problem bedevilling Puerto Rico is not simply its $72bn debt pile, but the fact that it lacks any obvious mechanism to restructure it. The island could be in for a choppy time in the municipal debt markets. Other debt-laden entities, such as the state of Illinois, might soon be caught in the storm.

To understand this, look at Puerto Rico’s numbers. A couple of decades ago, this US territory of 3.5m people enjoyed a healthy rate of growth, driven by a large American military presence and tax breaks that attracted mainland businesses. But since then, tax breaks have ended and military budgets have been cut. Output has shrunk by around 10 per cent in real terms since 2005.
Normally, this might cause creditors to panic. But since global markets have been flush with liquidity, and municipal bonds offer tax breaks for American investors, money has instead flooded in. That has enabled the government to maintain a generous welfare state, and a governance culture that is (at best) inefficient and (at worst) rife with cronyism. Meanwhile, the debt-to-output ratio has surged above 100 per cent — or 150 per cent if unfunded liabilities, such as pensions, are included.

This pattern is unsustainable. So Prof Krueger — entirely sensibly — proposes two initiatives: Puerto Rico must implement structural reforms, such as cutting welfare payments and labour costs; but it also needs to restructure the debt to a more sustainable level.