By Zach Schepis
Image courtesy of Wikimedia Commons.
An unmistakable trust is inherent in every monetary transaction. A dollar bill changes hands, changes faces, changes currencies, and we continue to believe in its buying power. Though the United States continues to cope with the aftermath of the 2008 recession, the country still remains an economic superpower.
In a world where the support of international economies and titans of industry hold the sway of investment, every calculated rise and fall of the market hinges upon the faith of nations.
What happens when the debt of a territory grows to such a staggering deficit that the only prospect remaining is the dream of an eventual rise? When the leading money managers and investors begin taking risks on junk-rated assets, with fingers crossed and dollar signs appearing in midair like a greedy mirage over the poker table?
There is trouble in paradise. The Spanish nickname “Port of Riches” now bears more than a hint of irony for the island of Puerto Rico. Promises of foreign trade were forbidden since the passing of the Merchant Marine Act of 1920. The restriction doomed foreign ships bearing Central and South American, Western European, and African goods from offloading in any Puerto Rican port.
Incoming ships are required to first travel directly to US ports before breaking bulk and heading to the commonwealth. Puerto Rico ultimately ends up saddled with the brunt of these costly transportation expenses.
The situation is called “cabotage” and with good reason: these continued exploitations became an unfortunate accumulation that the economy simply can no longer afford. The island is currently buried under a staggering $73 billion in debt and a jobless rate two times that of the US.
Old San Juan, Puerto Rico. Image courtesy of Wikimedia Commons.
Ernesto Rivera Sr. just turned 84 earlier this year. He’s lived on the island his entire life. Through the meditation of his recent retirement, he reflects upon the economic developments he witnessed.
More than a tinge of sadness and bitterness is heard in his voice that creeps into the slow rolling reverie.
“People are finally starting to realize the consequences,” he tells BTR. “Now we’re seeing the results of all the poor decisions, the mismanagement, and political angling that has brought the island’s economy to its knees.”
Mismanagement is certainly one way to put it. Truth be told, there is a genuine profit sneering around the corner of every heavy-handed economic arbitration–especially when dressed up as little more than an ineffective bit of protection. The Jones Act, section of the Merchant Marine Act, requires vessels importing to or exporting from Puerto Rico to be US-flagged, owned by American companies, and, among other restrictions, crewed by at least 75 percent US citizens.
Though argued as a measure of security, the powers the Jones Act grants the US enables the mainland to effectively cut Puerto Rico off from using its geographical advantages to benefit trade. Imports of Puerto Rico from the American mainland are vital enough to place the commonwealth in the top 10 rankings among all nations as an importer of US goods and services.
Perhaps the US stays continually protective over shipping exercises because of its loss of dominance over the international waters. While American merchant marines used to dominate the ocean, the force has gradually shrunk to a tenth of its size since 1955.
Another reason behind justifying these acts of cabotage, and more specifically the integration of the Jones Act, was to provide the commonwealth with more jobs. According to statistics provided by the Census Bureau, the job effort is a miserable failure. Aside from the abysmal unemployment rates, Puerto Rico lost close to 200,000 people since 2000. After eight consecutive years of loss, the island’s population is now estimated to be only 3.62 million.
“We’re suffering from brain drain,” says Rivera Sr. “It doesn’t surprise me to see so many professionals and trade people leaving here for the states, where they can enjoy more jobs and better wages.”
Long-standing witnesses like Rivera Sr. watched helplessly as Puerto Rico underwent a whirlwind of transformation. Laying waste to agriculture in a time where the sentiment of “working the land” is largely abandoned, the ghosts of abandoned industries still cast their shadows of expired tax incentives.
Ernest “Ernie” Rivera Jr. might not have the spectrum of experience like that of his father, but his insights as an employee in the cruise ship industry provide further evidence of the island’s downward spiral.
“The tourism industry here used to be so fruitful,” he tells BTR. “I don’t wish to undercut the quality of life this island affords us, through her nature. It’s a wonderful warm climate, and it’s incredibly beautiful.”
He goes on to explain, however, that the service (tourist) industry is no longer large enough to support the economy or battle unemployment. He remembers a time when he even used to see hopeful travelers looking to settle, envisioning a better life. Now most of these people are illegals from surrounding islands who contribute to an increase in drug use and drug-related crime.
Reducing the island’s debt will undoubtedly take a great deal of time and patience, but what approach might offer the best hope?
Matt Dalton, chief executive officer of the New-York based Belle Haven Investments, has overseen $2.2 billion in Puerto Rican municipal bonds.
“If your credit card debt is as much as you make,” Dalton asked Bloomberg, “how do you fix that problem? There’s definitely not an obvious fix.”
American lawmakers seem to believe in a remedy. The debt rebounded after lawmakers approved a law in June that allowed designated public corporations to restructure their balance. Just a few weeks ago the island’s delegate in the House of Representatives proposed a bill that will allow some agencies to file for bankruptcy protection.
Much of the hope comes from investment gamblers who believe that despite a restructuring, bonds will most likely entail some form of profit. Monoliths like Franklin Resources Inc. are spurring money managers to add junk-rated bonds to a pool of mutual funds concentrated on equities or other asset classes.
Perhaps the starkest symbol of this restructuring comes from the Puerto Rico Electric Power Authority (PREPA), which can barely manage to keep its electricity flowing–running on a current of borrowed time. A host of banks, including Citibank and Canada’s Scotiabank manning the helm, settled on an extension of $671 million in credit lines that PREPA needs to buy oil essential to maintaining operational capabilities.
As the threat of darkness hovers on the horizon, in every faint and flickering bulb, in the last threads of hope keeping the commonwealth’s spirit from dissolving into the ocean, Rivera Sr. laments with a sigh.
“Matters are looking bleak at best. The hole is very deep.”
Longtime analyst of PREPA’s troubles, Center for a New Economy policy director Sergio Marxuach speculated about this vicious cycle in a recent interview. Eschewing deaf ears, Marxuach insisted that even with the credit extension a complete rebound is simply not viable. It is no longer sustainable
They are essentially at the mercy of their creditors right now, he said, along with the oil companies.
And the vultures.