Economy

Hedge Funds Helped Wreck Puerto Rico’s Economy, And The Poor Are Paying The Price

CREDIT: AP

SAN JUAN, PUERTO RICO — Angry graffiti scrawled across the brightly colored buildings of San Juan tells the creditors of the world exactly where they can stick their plan to extract roughly $73 billion in debt from the struggling U.S. territory. “Puerto Rico comes first. To hell with the debt,” reads one wall. “Don’t play around with my retirement,” says the side of a major freeway. Down by the University of Puerto Rico, the walls and sidewalk are filled with laments — “Look into my unemployed face” — and calls to action: “Study and fight!”

Depending who you ask in Puerto Rico, the debt crisis was caused by neo-colonial and imperialist policies from the U.S., the Puerto Rican government’s wasteful overspending and corruption, or the cadre of hedge funds that are currently profiting from the island’s woes. Add to that toxic mix a series of free-trade agreements that triggered mass outsourcing, and a population in rapid decline due to out-migration, and you arrive where we are today, with the government on the hook for tens of billions of dollars.

After the island’s Public Finance Corporation failed to make a major payment due this weekend, the threat of a default looms larger still.

Two recent reports, one by former consultants of the International Monetary Fund and the other by the island’s hedge fund creditors, say the only way out of the mess is a regime of harsh austerity that eliminates the minimum wage, sells off public buildings and assets, lays off teachers and shutters schools, cuts workers’ vacation and benefits, and raises sales taxes and electricity rates.

Pedro Pierluisi, Puerto Rico’s sole representative in the U.S. Congress, told ThinkProgress he somewhat agrees with this model. “When you tell me ‘austerity,’ I tell you, of course we have to be austere. Of course we have to be fiscally responsible. When our financial viability is at stake, we should all be concerned.”

Speaking to ThinkProgress in the office of his pro-statehood political party, Pierluisi said in alternating English and Spanish that Puerto Rico must prioritize paying its debt — not only because their Constitution mandates it, but because it’s the “adult” thing to do.

“We can’t follow Argentina. Argentina has spend 12 years fighting its creditors before tribunals and they’ve lost billions in foreign investments. I don’t want that model for Puerto Rico,” he said. “So we have to talk to our creditors in a responsible and civilized way. We have to say, ‘I want to pay you. Help me pay you.’ That’s what I don’t see: both sides sitting down at the table to negotiate like adults.”

Rep. Pedro Pierluisi hugs a supporter outside the offices of his pro-statehood party.

Rep. Pedro Pierluisi hugs a supporter outside the offices of his pro-statehood party.

CREDIT: Alice Ollstein

Pierluisi, who will run for governor of Puerto Rico in 2016, has introduced bills that would give the island the same bankruptcy protections as U.S. states and cities. This would allow the commonwealth to restructure its debt in a more manageable fashion. But Pierluisi has no vote in Congress, even though he represents more U.S. citizens than any other House member, and hope for passing the proposal has fizzled in the face of Republican opposition. Furthermore, the White House has already ruled out a bailout.

Without a lifeline from the mainland, the island could run out of cash as soon as this summer, sending the economy into a Greece-like spiral that makes the path to austerity all the more likely.

For some U.S. progressives, including presidential candidate Bernie Sanders (I-VT), this is a “moral outrage.”

“At a time when 56 percent of children in Puerto Rico are living in poverty, the last thing that Puerto Rico needs is more austerity,” he said in a recent statement. “The people in Puerto Rico should not be forced to suffer so that a handful of billionaires can make even more money.”

According to a new investigation, many of those same billionaires demanding payment from Puerto Rico have also profited from the debt crises in Greece, Argentina, and Detroit. These hedge funds specialize in buying up “distressed” assets and pushing governments to take on debt they can’t afford under predatory rates and conditions. At the same time, the groups are lobbying Congress to not allow the island to declare bankruptcy, as doing so would cut into their profits.

“The reason Puerto Rico has such unsustainable debt has everything to do with the policies of austerity and the greed of large financial institutions,” said Sanders. He additionally noted that just seven years ago, Congress “acted with a fierce sense of urgency to bail out Wall Street,” yet is now dragging its feet on helping the commonwealth of Puerto Rico.

Puerto Ricans march in protest with sign reading: "The people cry out for the rich to pay for this crisis."

Puerto Ricans march in protest with sign reading: “The people cry out for the rich to pay for this crisis.”

CREDIT: AP

In the working class neighborhood of Santurce, in a union hall decorated with the Puerto Rican flag and photos of “martyrs of the struggle,” a group of a few dozen professors, laborers, and activists met in late-July to pick apart the proposals on the table and brainstorm their own solutions. Those at the meeting and other residents who spoke to ThinkProgress blasted Pierluisi and other politicians for supporting the proposed austerity model, which they warned would only further decimate the fragile economy, and push even more Puerto Ricans to flee to the mainland United States.

“Austerity is usually oriented at the people who need the most,” said Aaron Gamaliel Ramos, a professor of Caribbean Studies at the University of Puerto Rico. “Our greatest concern should be for workers in the lower echelons of society.”

Today, the island has the highest unemployment rate in the nation, at over 12 percent, and more poverty than any other state.

While Ramos acknowledged that a high level of corruption and wasteful spending does exist in Puerto Rico, he criticized the calls from the hedge funds to shut down schools — more than 100 of which have already been closed — and slash the social safety net.

“It’s not a black and white debate — cuts or no cuts,” said Ramos, whose own retirement fund is on the chopping block, along with his 92-year-old mother’s Social Security. “We need to ask: what should we do before we cut? What is so valuable to society that it should not be touched?”

The Zoilo Ferrero elementary school in Guayanilla, Puerto Rico is one of more than 100 shut down due to the budget crisis.

The Zoilo elementary school in Guayanilla, Puerto Rico is one of more than 100 shut down due to the budget crisis.

CREDIT: Alice Ollstein

Yet others say there should be no cuts at all, at least for now. Instead, argues Martha Quiñones Dominguez, an economics professor at the University of Puerto Rico, the country should order an independent audit of the debt to see which creditors’ claims are valid and which are illegal. She also called on the government to raise taxes on the wealthy and corporations, put a moratorium on debt payments, and use the money instead for sustainable development that will help cut down on costly imports.

“The current model of catering to foreign business and capital is a model of dependency,” she told the workers’ meeting. “We have to invest in local businesses that are truly invested here and won’t pick up and leave when things get tough. Walmart will leave. Costco will leave. What will be left?”

Many of those present, including Dominguez, told ThinkProgress they identify as independentistas — those who want the commonwealth to break off from the U.S. and become its own sovereign nation. If this happened, they argued, the island could set its own wages and trade policies to boost development.

As it is, many expressed frustration that the average Puerto Rican has no say either in the U.S. Congress that may decide its fate, or in the high level negotiations between the creditors and the government that are now taking place behind closed doors.

“They’re debating our future without consulting us,” said Dominguez. “If they claim the debt belongs to all of us, they need to talk to all of us. The people are the most important bond holder in Puerto Rico.”