Come on Congress, the guy from Hamilton did a LITERAL song and dance number in hopes you guys would have passed a crucial debt relief bill!
If you didn’t know, Puerto Rico is in some real bad debt. If you want to have some primer on the whole situation you can check out our basic rundown of it or instead hear Lin-Manuel Miranda – of Hamilton fame – rap about it if you wish.
The basic situation now stands that Puerto Rico has defaulted on about $422 million in debt payments on May 1st since Congress couldn’t pass legislation to allow the US territory to allow them to file for bankruptcy and restructure its debt. It’s important to understand that this $422 million we’re talking about here falls under the category of technical default, which means it now opens the door to more consequential cuts for everyday services like education and domestic services such as electricity. So far, the island territory has been able to survive by juggling resources, transferring funds from one infrastructure project to another, funneling money wherever crucial.
Yet based on some Republicans’ reaction to the Puerto Rico debt bill, you would think debt relief meant a federal government bailout of Puerto Rico’s debt. However, as you may have expected, that is nowhere near the case. Or…
The multiple pieces of legislation that have been introduced to Congress would allow Puerto Rico to declare bankruptcy – something that all states and municipalities have the right to do – so they can avoid technical default status. It’s similar to the reason why when a city like Detroit was heading into default status; its ability to declare bankruptcy helped the city continue basic services for its citizens. Unfortunately, without legislative action, Puerto Rico doesn’t have that option!
So where’s the hesitation coming from? It all has to do with this political ad.
It comes from The Center for Individual Freedom (CFIF), a group that… well, no one really knows anything about. With current election laws the way they are, CFIF are not required to disclose their donors, so it makes it impossible to know who’s exactly behind the group. But, people generally have a good idea who they could be.
Considering over the last few years, Puerto Rico has become a haven for wealthy brokers to store money in the island territory, it’s a good bet hedge funds have something to do with the creation of the CFIF. As the territory started to experience deep financial woes, the Puerto Rican government started to create various tax havens for big money investors and handing out record-low bonds which many Wall Street firms jumped on (the bonds are around $70 billion outstanding today)! Generally speaking, hedge funds have the most to gain from Puerto Rico going into severe default status, plus it would explain why so many in Congress would have been spooked by a pretty important, yet unassuming, bill.
Yet for Congress, there is still time to help Puerto Rico considering the most devastating default has still yet to happen.
On July 1st, Puerto Rico is told to owe $1.9 billion (!!!) in what are called general obligation bonds, which usually have the highest level of guarantees, meaning a lot of individuals have their money in these types of bonds.
To get a better idea of how conditions are currently being managed, Puerto Rico’s Governor Garcia Padilla said on Sunday that the island territory is having problems fueling police cars and emergency response vehicles. He went on to say that important services that affect the most vulnerable, such as special education initiatives, could very well be cut next due to the lack of institutional debt relief! So if Puerto Rico doesn’t get some kind of debt relief plan by July 1st, the situation over there could get even worse than it is!
However there is some hope. Considering the July 1st default could do major damage to the $3.7 trillion US municipal market (aka the bond market), that could stir many in Congress into action. Unlike the past defaults where it only affected the over 3 million US citizens currently living in the island territory, the July 1st default would affect anyone with money in the bond markets (ie basically everyone, including those on Wall Street and potentially angry constituents seeing their retirement affected by the lack of Congressional action in regards to Puerto Rico).
So in that case, the system works!
(Photo Credits: Pixabay.com, Google Images)