Why you should care about Puerto Rico’s money problems, even if you don’t know anyone there
U.S. Treasury Secretary Jack Lew is touring the island today, telling the people in Puerto Rico that he’s on their side and understands something has gotta give. But he’s not really directing his message to the people in San Juan or any of us on the mainland. He’s talking to Washington. Lew was in Los Angeles last week doing the same thing. He’s on a mission to try to sell Congress on the need for an organized restructuring of the island’s debt. It’s a surprisingly tough sell, and I can sort of relate.
I feel like a bit of a broken record because I say this at the top of anything I report on about the island — Puerto Rico is in debt. A lot of debt. More than $70 billion. More debt than any U.S. state other than New York or California. And there are only 3.5 million people living there.
Aside from Jack Lew, Lin-Manuel Miranda and me, most people in the U.S. don’t seem too alarmed by this problem. Yet, the default of payments on this debt could have some major repercussions.
The U.S. government has an obligation to Puerto Ricans, who are U.S. citizens, and a default affects the value of Puerto Rico bonds. Lots of Puerto Ricans hold government bonds. There were even bond packages that were only available to Puerto Ricans living on the island. So, they bought them. But a lot of us on the mainland bought Puerto Rico bonds, too. Hell, you might even hold some of them in your 401k (how many of us actually keep track of that stuff?). They were triple-tax exempt (a term I’ve become all too familiar with), so basically every municipal bond investment firm wanted them. Now, the problem is there’s just no money to pay it back. Puerto Rico is insolvent.
Then there’s the argument that the territory’s problem could set legal precedent. The Puerto Rican government defaulted on a payment last week of about $422 million last week and this could redefine what a general obligation bond is for everybody in the U.S.
John Mcdermott, a fixed income specialist with Stoever Glass on Wall Street, told me this previously:
“Bond holders at general obligations generally get paid 100 cents on the dollar. They’re way ahead of the other creditors. However, Puerto Rico is trying to redefine that status.”
It’s one thing to not get that interest payment on those bonds. It’s another thing to live in a place that’s closing schools, shutting down hospitals and talking about limiting basic public services like water and sewage because the utilities can’t pay for it. That’s what the people living on the island are dealing with. And then there are people who worry about their pensions (because they’re massively underfunded) and who can’t find jobs even though they’re trained as doctors or engineers.
After reporting on the situation for more than six months, I convinced my bosses at Marketplace to send me to the island. They gave me a week. I wanted to understand what Puerto Ricans were worried about, what they knew about the crisis and how it was affecting them.
One engineer I spoke with, Javier Alayon, was getting ready to play a gig with his band in La Perla, a part of San Juan many people tell you not to venture into without someone from there. I asked him how things were in Puerto Rico and told me this:
“I just gave away my house to the bank because I can’t afford it anymore,” he said. “Within a week and a couple of days, I have to be out of my house with my family. I guess it’s a sad situation, but I guess I am here today.”
I feel like I kind of know what Puerto Ricans are going through. But I was also only there for a week. I saw all that I could and traveled around the island to get a sense of things, but it’s still only a week. I asked every Puerto Rican I met the same questions and got so many different answers, because it’s impossible to put a little bow on explaining this economic crisis and the repercussions it will continue to generate.
I feel you, Secretary Lew. Puerto Rico is a tough sell. And the only thing I’m trying to do is tell a little story; you’re trying to get Congress to change the law.
See more of Andy Uhler’s reporting on Puerto Rico’s debt crisis here.
