Abolish the debt that is drowning Puerto Rico

We need to organize for immediate disaster relief for Puerto Rico–but we can also expose and oppose the debt disaster that came before the hurricanes.

Families begin to rebuild after the hurricane in Patillas, Puerto Rico (Andrea Booher | Wikimedia Commons)

Families begin to rebuild after the hurricane in Patillas, Puerto Rico (Andrea Booher | Wikimedia Commons)

SOCIALIST WORKER supports President Trump in his call to cancel Puerto Rico’s punishing debt.

We can pretty much guarantee you’ll never see the first five words of that sentence here ever again–and the supervisors of the “adult day care center” at 1600 Pennsylvania Avenue are obviously trying like hell to make sure we never have reason to.

But it says a lot about the Wall Street-made catastrophe that has plagued Puerto Rico for years before Hurricane Maria that even a reactionary fanatic like Trump didn’t think twice before stating the obvious.

“They owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out,” Trump said in an interview last week with Geraldo Rivera of Fox News. “I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that.”

“Wall Street promptly freaked out,” Politico reported the next day. That was an understatement. Heavy trading on the normally stable bond market pushed the value of Puerto Rico’s general obligation bonds–already devalued to 56 cents on the dollar after the island effectively declared bankruptcy earlier this year–down to 37 cents on the dollar.

The White House then “move[d] swiftly to clean up Trump’s seemingly offhand remarks,” Politico continued. Again an understatement. Office of Management and Budget Director Mick Mulvaney was rushed in front of a television camera to tell CNN: “I wouldn’t take it word for word with that.”

Just to make sure Wall Street got the message that no one in the Trump administration had any intention of doing what the head of the Trump administration had just said, Mulvaney was more explicit–and more contemptuous of the Puerto Rican people–in a second interview with Bloomberg: “We are not going to bail them out. We are not going to pay off those debts.”

Anyone want to bet that Trump doesn’t talk about “saying goodbye” to Puerto Rico’s debt again?

But the simple fact is that justice demands exactly that: The cancelation of all of Puerto Rico’s debt repayments, by the action of the U.S. government, taking responsibility for the Wall Street loan sharks who inflicted the damage in the first place.

Puerto Rico is caught in the same kind of debt trap that has ensnared poor countries in hock to the International Monetary Fund and World Bank–or more advanced economies like Greece, at the hands of European bankers and bureaucrats. The aim is to force vulnerable societies to knuckle under to the will of the ruling class.

And now, the devastation of neoliberal policies has made Puerto Rico’s crisis following Hurricanes Irma and Maria much, much worse.

People who want to show solidarity with Puerto Rico today will rightly focus on ways to provide immediate relief to communities desperate for food, water and critical supplies. SW hopes its readers will raise what money they can to donate to grassroots efforts–see the What You Can Do box with this article.

But we have another job to do now, while Puerto Rico lingers in the media spotlight: expose the debt trap that made the island more vulnerable when Maria struck and demand that it end.

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IN MAY of this year, Puerto Rico’s government went to federal court to file for the equivalent of bankruptcy on a debt that includes over $74 billion in repayments on government bonds and $49 billion in pension obligations. But in return for immediate relief, Puerto Rico will have to abide by even harsher austerity dictates.

The debt burden–which is larger than the annual economic output of the island when pension obligations are added in–is one consequence of a recession that has lasted for more than a decade.

The economic slump began when Corporate America–after many years of making super-profits off operations in Puerto Rico, particularly pharmaceutical production–abandoned the island after favorable tax incentives for investment were phased out starting in the early 2000s. Annual corporate investment in Puerto Rico peaked at 20.7 percent of gross domestic product in 1999–it has fallen to under 7.9 percent as of 2016.

Successive governments–whether led by New Progressive Party, which is aligned with the U.S. Republicans, or the Popular Democratic Party, tied to the Democrats–imposed policies that were guaranteed to make the crisis worse: neoliberal austerity.

Social spending was cut drastically–reductions in the island’s education budget led to hundreds of schools being closed, for example. Public-sector workers have been under intense pressure, with tens of thousands of layoffs and attacks on their unions. Regressive taxes have been hiked, making the sales tax of 11.5 percent higher than any U.S. state.

A succession of state assets were privatized on terms guaranteed to benefit the private purchasers: Back in the 1990s, conservative Gov. Pedro Rosselló González sold off hospitals that were part of a public health care system that was once fairly accessible and affordable at around half their market value.

Austerity measures propelled the vicious circle: Continuing economic decline made shortfalls in government revenues worse, leading to more spending cuts and regressive taxes that caused further economic contraction, and on and on.

The consequences even before Hurricane Maria were dire: Official unemployment is 11.7 percent, well over double the rate in the U.S. as a whole. Just under half of people on the island live in poverty, including three in five children.

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THROUGH IT all, debt was the straitjacket to make sure Puerto Rico didn’t stray from austerity.

Faced with declining revenues as a result of the contracting economy, various branches and agencies of the Puerto Rican government issued bonds to raise money–but these came not only with the usual obligation to repay the cash with interest, but increasing pressure to intensify neoliberal measures.

The vultures of Wall Street were eager to set up the increasingly complex bond issues. They paid better than most municipal issues, and interest on income from Puerto Rico bonds is exempt from city, state and federal taxes.

But the biggest gamblers on Wall Street see more than a tax loophole in the suffering of the people of Puerto Rico. A 2015 report from the Hedgeclippers.org website paints an ugly picture:

Several groups of hedge funds have bought up large chunks of Puerto Rican debt at discounts and have also pushed the island to borrow at extremely favorable terms for creditors. Hedge fund managers are also recommending the implementation of austerity measures.

Known as “vulture funds,” these investors have followed a similar game plan in other debt crises, in countries such as Greece and Argentina. The spoils they ultimately seek are not just bond payments, but structural reforms and privatization schemes that give them extraordinary wealth and power–at the expense of everyone else.

It’s been obvious for several years that Puerto Rico’s debt burden is unpayable, but the hedge-fund vultures are counting on enforcers in the form of the U.S. government.

A law pushed through Congress last year by Barack Obama and the Democrats established a seven-person Fiscal Control Board with broad powers to direct government agencies on the island and dictate laws and policies. It has ordered, for example, exemptions to federal standards on the minimum wage, Medicaid and Temporary Assistance to Needy Families.

To top it off, the seven members of the board include some of the same financiers who imposed neoliberal policies and arranged the deals that caused the debt burden.

Bondholders may still be forced to take a “haircut”–that is, accept less than what they are owed on Puerto Rico’s bonds. But the mission of the Fiscal Control Board is to make sure working people on the island, not investors, pay as much of the price as possible.

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ALL THIS “reads like the 21st century equivalent of the metropolitan looting of wealth from the colonies,” as Lance Selfa wrote for SocialistWorker.org after Hurricane Maria struck Puerto Rico head on.

And we know who the looters and their accomplices are.

The hedge-fund parasites who are trying to inflict more suffering on Puerto Rico rather than lose a penny from their investment gambles should face pickets outside their offices. Members of Congress–Republican and Democrat alike–should be greeted at public events by solidarity activists demanding that they remove the noose that is strangling the island.

There is much work to be done to organize for immediate relief in Puerto Rico after the hurricane catastrophe. But the left has an opportunity to also expose and oppose the unnatural disaster that came before Irma and Maria.

We may not hear any more about canceling the debt from Donald Trump, but we can raise our own voices to demand that this crushing burden be lifted off the people of Puerto Rico.



Argentina is right to defy the Taliban of global finance

by Jerome Roos on August 2, 2014

Post image for Argentina is right to defy the Taliban of global financeFinancial fundamentalism of vulture funds and US Judge Griesa — not Argentine contempt — are to blame for the country’s second default in 13 years.

On Wednesday, Argentina defaulted on its sovereign debt for the second time in 13 years, defying a US court ruling and a small cabal of financial fundamentalists led by the right-wing multi-billionnaire hedge fund mogul Paul Singer. Needless to say, most mainstream analysts are already bandying the usual platitudes, having us believe that Argentina’s populist government and its economic mismanagement are to blame for this outcome. While there is little point in defending Argentina’s corrupt political elite here, it is important to provide a much-needed corrective to this tired mainstream narrative.

The first thing to note is that, despite repeated accusations by the vultures that Argentina is in contempt of US court rulings, Argentina’s willingness to pay its debts is not in question. The country has credibly committed itself to repaying its foreign creditors ever since it restructured its unsustainable debt load in the wake of its historic 2001 default, with over 93% of bondholders accepting crisp new bonds in 2005 and 2010. In fact, the government last month deposited $539 million with the Bank of New York Mellon to honor its commitments — in full and on time. Willingness to pay is simply not an issue.

So if Argentina is willing to pay, and actually fulfilled its obligations by transferring the money to its creditors, why is it now considered to be in default? The problem is that the Bank of New York, like all financial institutions, was under orders from Judge Griesa of the District Court of Southern New York not to transfer any of Argentina’s cash to its claimants unless the government first paid a small group of so-called “hold-out” creditors who have been tirelessly suing the country for full repayment ever since its initial 2001 default. Far from being unwilling pay, US court orders thus left Argentina unable to pay, simply because its creditors could not receive their payment.

President Fernández was therefore not entirely wrong when she thundered that Argentina cannot be said to be in a state of default, and that “they’ll have to invent a new term to define what’s happening.” Moments after she spoke these words, a new hashtag started trending on Twitter: #GrieFault. The term does indeed seem to approximate much more closely what is really going on.

The deeper problem behind the GrieFault, however, boils down to the fact that Argentina is facing not just one group of bondholders, but two: first, a group of “exchange bondholders,” with whom it has maintained good relations ever since the restructuring, and then the group of “hold-out” creditors — mostly vulture funds who refused to accept the terms of the deal and held out for full repayment — with whom Argentina has been engaged in a protracted legal battle. In June, the refusal of the US Supreme Court to hear Argentina’s appeal to an earlier ruling by Judge Griesa left Argentina unable to pay its exchange bondholders if it did not first pay the hold-outs (i.e., the vultures).

Griesa’s ruling affects only $1.5 billion in claims, which Argentina is technically able to repay without running into serious trouble. The problem, however, is that the country’s government is bound by domestic law to honor the so-called Rights Upon Future Offers, or RUFO clause, included in the restructured bonds. This clause precludes the government from offering better terms to the hold-outs than to its exchange creditors. In other words, if Argentina were to give the hold-outs a better deal under pressure of Griesa’s ruling, it would have to offer the same deal to all of its creditors — potentially triggering $120 billion in additional claims, according to the most conservative government estimations.

With the country’s economy in recession and its foreign exchange reserves depleted to a mere $30 billion, such claims would totally overwhelm Argentina’s finances and would lead to a much more dramatic default than the current one, which affects only the aforementioned $539 million that fell due on June 30 and whose grace period expired on Wednesday. In other words, by refusing to pay the vulture funds and trying, in good faith, to honor its obligations towards the slightly more sensible exchange bondholders, Argentina can be said to be more committed to preventing default than Paul Singer or Judge Griesa. Argentina, in other words, is the better capitalist here.

The vulture funds, by contrast, constitute the Taliban of global finance. Unlike many of Argentina’s exchange bondholders, the vultures were never a proper creditor to the country to begin with. They did not lend Argentina a single dollar; rather, they bought up its distressed bonds on the secondary market for mere cents on the dollar. This was easy to do because, by late 2001, many of Argentina’s bondholders were small retail investors, including pensioners in Italy, Germany and Japan. Terrified at the prospect of losing their life savings, many of these desperate retail investors sold their bonds to Wall Street hedge funds at greatly discounted prices in the wake of the default.

The majority of these hedge funds subsequently accepted the 2005 restructuring deal. Having bought the bonds for as little as 15 (some say 6 cents) on the dollar, they restructured for 30 cents — landing the speculators handsome profits in the process. Besides this, the deal included a number of sweeteners to incentivize high investor participation. Most importantly, the new bonds came with a so-called GDP warrant attached, which meant the exchange bondholders would receive greater returns if Argentina’s growth exceeded a certain threshold. With the country’s economic growth at a steady 7-9% between 2001 and 2008, the exchange bondholders made a windfall.

For some, however, even this was not enough. Led by Singer, the vulture funds — true to name — displayed even more predatory and opportunistic behavior than the exchange bondholders: they simply wanted it all. Of course, the demand for 100 cents on the dollar was entirely unrealistic to begin with, but by chasing Argentina around the globe over the past decade, taking it to court in various jurisdictions and trying to lay claim on its foreign assets, including its embassies and even the presidential airplane, the vultures have tried hard to claw back as much as possible — unsuccessfully, so far.

In late 2012, Paul Singer’s minions seemed close to success when they briefly managed to attach Argentina’s flagship navy vessel, La Libertad, in Ghana, holding the ship ransom to full repayment and nearly triggering an international crisis when the warship’s sailors brandished automatic rifles at Ghanian port officials after they were denied permission to leave the port. Apparently, barring outright mafia methods, no means are too extreme for the vultures. The Griesa ruling, however, surpassed any of the previous methods in its ferocity. “We’ve had a lot of bombs being thrown around the world,” Joseph Stiglitz said, “and this is America throwing a bomb into the global economic system.”

To some, Argentina’s outright repudiation of Griesa’s ruling may therefore look like yet another sly feat of debtor defiance. Still, we should not be deceived by first appearances. In truth, Argentina’s two defaults never really targeted global finance. While the 2001 default mostly harmed an unsuspecting panoply of small retail investors in Europe (Wall Street had already dumped its bonds in the scandalous mega-swap earlier that year), the current one is narrowly directed against a very small subset of speculative investors — a particularly fundamentalist faction of global finance that is so ruthless in its pursuit of profit that it does not shy away from hounding crisis-ridden developing countries even as their citizens face widespread social dislocation to repay the public debt.

Of course, Argentina did the right thing by telling these vulture funds to get lost — just as it did the right thing by refusing to fully honor its unsustainable external debt in 2001. A victory for Singer and co would have set a disastrous precedent that could have made it much more difficult for heavily indebted countries (not just Argentina) to restructure their debts in orderly fashion in future crises. But, even as we should applaud Argentina’s decision to reassert its economic sovereignty, it is crucial to note that the default is not as bad for foreign creditors as it may sound. In fact, in a particularly astute analysis, financial commentator Felix Salmon has convincingly argued how both exchange bondholders and holdout creditors actually stand to gain from the GrieFault.

Moreover, as I have argued in a previous column, the Argentine government has in recent months been forced to seek rapprochement with its foreign creditors in order to satisfy the country’s growing structural dependence on foreign capital. Ever since 2005, the government’s scathing rhetoric against global finance — the vultures above all — has gone hand-in-hand with a pragmatic policy approach aimed at gradually restoring investor confidence and access to international capital markets. While the GrieFault may appear to the unsuspecting and ill-informed eye as yet another radical rupture with the logic of neoliberal finance, a closer inspection suggests otherwise: it was precisely in an attempt to maintain good relations with the exchange bondholders and the global financial community more generally that Argentina decided to defy the vultures.

Many ordinary Argentinians, fully cognizant of this fact, and increasingly frustrated with the protracted and deepening economic crisis back home, no longer hold out much hope for conventional solutions — whether neoliberal or neo-Peronist. “It doesn’t matter if it is a judge in New York City or a president in Argentina,” one Porteño was quoted as saying. “I feel that neither cares about people, and about the future of this country. It’s as if these people who have power were laughing in the face of us common citizens.”

Jerome Roos is a PhD researcher in International Political Economy at the European University Institute, and founding editor of ROAR Magazine. This article was written as part of his weekly column for TeleSUR English.