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Amid new austerity measures, Puerto Rico pushes to restructure debt

August 22, 2015 at 1:54 PM EDT
As Puerto Rico continues to struggle under crippling debt, a push within the territory to amend U.S. bankruptcy laws to allow the commonwealth to restructure its debt is underway. Meanwhile, Puerto Ricans are searching for new areas of economic growth to ease its financial crisis. Special correspondent Chris Bury reports.

CHRIS BURY: The financial crisis in Puerto Rico is clear in the emergency room of San Juan’s biggest hospital, Centro Medico, where patients line the halls, because there are not enough nurses to treat them or rooms to put them. Doctor Rosalie Barrios is the head of emergency medicine here.

ROSALIE BARRIOS: There is no beds available in the hospital, so they have to wait here for a bed.

CHRIS BURY: And how long does that take?

ROSALIE BARRIOS: Several days?

CHRIS BURY: Several days.

ROSALIE BARRIOS: Yes. To maybe a week, yes.

CHRIS BURY: The week-long wait is a symptom of Puerto Rico’s bigger troubles: a third of the territory’s debt is due, in part, to crippling health care costs. With more than 60 percent of residents qualifying for government-subsidized healthcare, hospitals rely on that money to provide services.

But the U.S. Government reimburses Puerto Rico at a much lower rate than states get. And now, a dramatic hike in sales taxes — a new austerity measure to help Puerto Rico pay back its debt — is squeezing health care even harder.

At Ashford Presbyterian Community Hospital in San Juan, the new, higher taxes are costing the Hospital even more for everything it has to buy, including all its supplies, according to CEO Pedro González.

PEDRO GONZÁLEZ: The impact for us, for the year, is going to be about $700,000.

CHRIS BURY: $700,000 more.

PEDRO GONZÁLEZ: More, right.

CHRIS BURY: Just for the sales tax.

PEDRO GONZÁLEZ: From the sales tax.

CHRIS BURY: The huge hike in sales taxes on the island — from 7 percent to 11-and-a-half percent…and another new tax on services — are expected to generate just over a billion dollars in new revenue. Not nearly enough to put a significant dent in Puerto Rico’s 72 billion dollar debt.  

GOVERNOR ALEJANDRO GARCIA PADILLA: La situación es en extremo difícil

CHRIS BURY: In June, Puerto Rico’s Governor, Alejandro Garcia Padilla, made a stunning announcement, appearing on television to say, quote, “The public debt… is unpayable.” And pledged to come up with a plan by the end of August.

Puerto Rico is in a bind. The White House has flatly rejected any kind of federal bailout. And the territory does not have access to the U.S. bankruptcy courts. So Puerto Rico has begun to default on some of its massive debt — the first such failure to pay by an American state or territory since the Great Depression.

CHRIS BURY: Do you think this will give Puerto Rico a black eye, that it will be seen as Greece?

DEL. PEDRO PIERLUISI: It’s happening already. And I hate it. Puerto Rico’s not Greece. Puerto Rico’s not a foreign country.

CHRIS BURY: Pedro Pierluisi is Puerto Rico’s non-voting Representative to Congress.

CHRIS BURY: Why is Puerto Rico defaulting on its debt?

DEL. PEDRO PIERLUISI: Well, first, it shouldn’t be defaulting. But the truth is we piled up quite a bit of debt — and I’m talking about 18 government entities which issued bonds — for decades.

CHRIS BURY: Some of those bonds are guaranteed by the Puerto Rican Constitution.  But others, such as those issued by the government-owned electric power authority, are not. Congressman Pierluisi has introduced a bill to allow those agencies to apply for Chapter 9 bankruptcy protection, just like they can in the states. It would let Puerto Rican owned entities and cities do what Detroit did: Restructure debts with all their creditors at the same time; wipe the slate clean.

DEL. PEDRO PIERLUISI: We need Chapter 9, because when you need to reorganize an entity, adjust its debts, the only way to do it in the U.S. in an orderly, legal fashion is under the protection of a federal bankruptcy court. We cannot. It’s unfair.

CHRIS BURY: The bonds were popular with investors, because they are tax-free, pay a high yield, and some have that guarantee in Puerto Rico’s Constitution. It’s estimated that Puerto Rico residents own about a third of the bonds. American investors, individually and through mutual funds, own billions as well. And hedge funds have also scooped up a big chunk… often at bargain prices.

Economist Arturo Porzecanski, a professor at American University, spent three nearly decades on Wall Street.

ARTURO PORZECANSKI: Passage of the bill would be correctly perceived as rewriting the rules retroactively and I think it would be a terrible precedent for the municipal bond market.

CHRIS BURY: He opposes bankruptcy because he says that would make it harder in the future for Puerto Rico to borrow money in the bond markets.

ARTURO PORZECANSKI: That is where the money is. It’s not in Puerto Rico’s banks, it’s not in the pockets of the people of Puerto Rico. They have to come out elegantly from this crisis in order to resume normal financing.

JOSH EARNEST, WHITE HOUSE PRESS SECRETARY: We believe Puerto Rico needs an orderly process to restructure its unsustainable liabilities

CHRIS BURY: the Obama Administration has indicated it supports Congress giving Puerto Rico the same access to federal bankruptcy courts. So have some presidential candidates, perhaps with an eye on Florida where nearly a million Puerto Ricans now live.

DEL. PEDRO PIERLUISI: Florida is a battleground state and Puerto Ricans are registering there to vote. And by the way Puerto Ricans could go either way. Depending on the stance, the particular stance that the candidates take.

CHRIS BURY: But some on Wall Street oppose any major restructuring of Puerto Rico’s debt. Instead, a report commissioned by more than 30 hedge funds demands more austerity in a territory still reeling from a nearly ten-year-old recession. The report calls for more aggressive tax collection, privatizing public works, and firing more teachers.

But Puerto Rico has already shut down more than 150 schools in the last few years, and teachers are leaving, being actively being recruited by states. Doctors and nurses are leaving too. Ophthalmologist Dr. Raúl Franceschi says he can easily double his salary in the states.

RAÚL FRANCESCHI: There are many physicians that are, we have this escape valve that we just go to any state in the states. We don’t have to stay here. We can flee.

CHRIS BURY: Have you thought about that?

RAÚL FRANCESCHI: Well, in the back of my mind, yes. And this has been a very, very hard year.

CHRIS BURY: So many Puerto Ricans are leaving for the United States–about 50,000 every year–that officials here worry more austerity could accelerate the exodus. They say that perpetuates a vicious cycle, leaving the government with even less money to pay its debts.

University of Puerto Rico economist Orlando Sotomayor believes Wall Street’s remedy would backfire.

CHRIS BURY: Is more austerity the answer?

ORLANDO SOTOMAYOR: No, the answer is growth. There is, we will just never be able to pay our debts through austerity. You cannot push a country too far, or it will just go into depression or recession. You cannot get blood from a stone.

CHRIS BURY: Instead, an influential new study, sponsored by the Puerto Rican government advocates lowering the minimum wage below the same $7.25 an hour that applies on the U.S. mainland –to make the island more competitive with its Caribbean neighbors.

The study also recommends exempting Puerto Rico from a 1920 law that requires all goods be imported on ships built in the U.S., which raises costs for businesses like Joel Franqui’s gift shop in San Juan.

JOEL FRANQUI: So, usually islands are more expensive in general, but I believe Puerto Rico is even more expensive because of that. Other islands in the Caribbean don’t have that limitation.

CHRIS BURY: Others here are calling for a rejuvenation of Puerto Rico’s once-thriving tourism industry, in 1980, the island accounted for a quarter of all Caribbean tourist dollars. By 2012, that number had fallen to 15%.  Puerto Rico is now attempting to add more direct flights from its main airport, in San Juan.  Economist Heidie Calero says it also needs to make a big push for tourists beyond the United States.

HEIDIE CALERO: As long as we have more direct flights, Puerto Rico is going to thrive. But we need to diversify. We have neglected going into Europe, going into Latin America

CHRIS BURY: Puerto Rico is also trying to attract more wealthy Americans by offering generous new tax breaks on investment income for those who live here at least six months a year. The idea is to lure more big spenders to boost the economy. So far, the government reports, a few hundred people have made the move, generating more than 200 million dollars in real estate sales.

ORLANDO SOTOMAYOR: It’s not going to make much difference in terms of economic growth. But at the same time it does create quite a bit of resentment. Because we have this group of very wealthy individuals who are given the best treatment on the part of the government. They pay very few taxes, whereas regular Puerto Ricans have to deal with this very high tax burden.

CHRIS BURY: with so many native Puerto Ricans leaving, the population left behind is increasingly old and poor, putting more of a strain on a health care system that is literally running out of money. That Puerto Rico is ailing is as clear as the long lines in San Juan’s hospitals and clinics.  But it’s just as evident the government here is still searching for the right cure.