Puerto Rico bankruptcy? Why and Where does it go next?
Puerto Rico bankruptcy? Why and Where does it go next?
by Lushfun
Some questions arise from the coming ‘bankruptcy’ of Puerto Rico, which technically cannot go bankrupt. New York and Texas have as government workers about 1 out of every 7 people in their civilian labor force, while Florida is at 1 government worker out of every 9 people. Puerto Rico is at around 1 government workers out of every 5 people. While this number has gone down from 2008 or so it did so with migration off the island. So from around 1.133 million people 229 thousand are government employees. Which hides the fact that quite a few of the industries on the island are essentially government owned and run. The quiet reality is that there is simply too few dollars entering the island and the economy has been set up in such a way as to make it impossible for it to recover. Bailing the island out will only make certain that the next time the funds needed are larger and will not solve the problem. Structurally the way it operates has to change and the whole distribution of money within the system through essential government control of all if not most major industry will end one way or another.
It does not matter that the wages are lower than in the U.S., it does not matter that the island has “tax incentives” for businesses to operate upon it. What does matter is that the nepotism and regulations on the local level essentially make certain that investing in a foreign country is more likely to succeed than in the local economy. Sales tax becoming VAT of over 10% and other improvements to make the dead economy keel over are paving the way for insolvency. Tourism is dead precisely for the fact that costs for tourists are not competitive with any and perhaps all Caribbean countries. Why would a tourist pay New York prices for steak and wine in Puerto Rico?
Where will insolvency lead? Well theoretically when payments shut down due to them being re-directed to pay creditors government employees will no longer be paid. There will probably be court battles that are ongoing and future going but none of this will make disruptions go away. If the debt Puerto Rico was nullified tomorrow, none of the structural problems go away. The sales/Vat taxes will still be there, the tourism sector will still be dead, the government overhead will still be there, and insolvency in major enterprises will persist.
It is very likely the pension debt Puerto Rico has will be nullified, or to put it more realistically pensions will stop being paid because the amount of cash coming in will not be enough to cover them. Real Estate market will have to have a complete collapse for any enticement for non-island money to pour into it.
The truth is Puerto Rico will be a test case to a degree. Of How, When, What, and to what degree things can be turned on or off and the consequences of said actions in regards to a population. Yes, I know this sounds terrible but I am an observer and my opinion is just that. I think in a certain way there was a perception by the government in PR that they could have the last say while the flows of money were kept going to ‘stabilize’ the everlastingly ‘deteriorating’ situation. The reason I say this is that funds required to keep the system afloat increase constantly as expenses rise even in a contracting economic environment. I wonder if the governor of PR ever considered making a Plan B or a Plan C where the only way out was to abrogate pensions and get rid of at least half of government workers. It would have been possible to restructure things were there some realistic movements 8 years ago, but alas wait and prey is what occurred. True there were a significant decline in government workers, but it was in the context of an exodus of people out of the island. I think to a degree the governor will be deprived of financial ability to maneuver and will be sidelined in the matters of making decisions in that sphere, and the rest will flow out of these constraints.
“The Authority will ensure the payment of debt obligations, restructure the workforce of the Commonwealth government, and reduce or freeze public pensions. It will also supervise the entire budget of the Commonwealth government, including its pension system, legislature, and public authorities; and all leases, union contracts, and collective-bargaining agreements.”*link on bottom*
Hopefully whatever happens the people of Puerto Rico will do well and it will pass quickly.
Be well dear reader, stay healthy, and hopefully summer will visit us soon.
http://www.economicpolicyjournal.com/2016/05/breaking-puerto-rico-will-declare.html
http://www.governing.com/topics/finance/gov-congress-puerto-rico-pensions.html
*http://www.thenation.com/article/orwell-in-puerto-rico-congress-promises-a-new-dictatorship/
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