Saturday, July 4, 2015

In Greece and Puerto Rico, rot has similar stench

Both debt crises show striking parallels in their causes and devastating effects -- should bankruptcy be an option?

By Bob Hennelly



By scale alone, the financial crises rattling Greece and Puerto Rico seemingly have little in common. Greece, which late Tuesday defaulted on its loan to the International Monetary Fund, has about $263 billion in outstanding debt, while the Commonwealth of Puerto Rico has just $72 billion on the books. Yet their plights reveal striking parallels both in what led to the present turmoil and in the debilitating effects.
Certainly the two are united in one way: The slow-burning decline in their respective economic well-being has long been readily apparent to anyone paying attention. Similarly, the powers that be worsened the slide by continuing to pile on more debt even as conditions in Greece and Puerto Rico deteriorated, while legal restraints narrowed the range of possible remedies.
The outcomes, too, show a remarkable -- and devastating -- similarity. Some 44 percent of Greeks live below the poverty line today; in Puerto Rico the figure is 45 percent. In both bases, the backdrop is a battered labor market that leaves little opportunity for younger people.
Labor force participation -- the share of the working-age population either in a job or looking for work -- in both regions is alarmingly low, with the World Bank reporting just 53 percent of Greece's potential workforce on the job, while in Puerto Rico is only 43 percent.
That compares with just under 63 percent in the U.S., where economists express concern about the sharply lower participation rate since the Great Recession. For broader geopolitical context, consider that workforce participation in war-torn Afghanistan is 48 percent.
The diminished opportunity in Greece and Puerto Rico is causing an exodus of young people, with hundreds of thousands moving abroad in hopes of finding work so they can send money home to their families. That has further eroded the tax base of both jurisdictions, undermining economic growth and making it harder to service government debt.
The mass departure of young Greeks and Puerto Ricans also has left a greater percentage of older residents more likely to require public assistance, swelling the debt load.
But economic misery is not all that Greece and Puerto Rico share. Possible ways to alleviate that misery are also similarly limited. Unlike a municipality like Detroit, neither government can take refuge in bankruptcy protection to help stop the downward spiral.
James Henry, a senior fellow at Columbia University's Center on Sustainable Investment, said that bankruptcy could help get Greece and Puerto Rico off the debt treadmill and on the path to recovery.
"We have bankruptcy proceedings for people and corporations, but not for sovereign nations like Greece or territories like Puerto Rico," he said. "The eye of the bankruptcy court is on what works. If we put people in debtors' prison, they can't pay off their debts. We give them a clean slate so they can become productive again."
Henry thinks European central bankers and officials, who have offered only minor concessions in the months-long bailout talks with Athens, are determined to make an example of Prime Minister Alexis Tspiras. The leader of Greece's left-wing Syriza party, who took office in April vowing to resist the deep government spending cuts and tax hikes that have hurt growth in Greece, on Saturday surprised eurozone finance ministers by ordering a July 5 referendum on the terms of the latest bailout offer.
"They are forgetting their history," Henry said of European leaders. "The world saw what happened when we saddled Germany after World War I with massive debts it could not pay. It led to fascism."
Congressman Charles Rangel, D-N.Y., tells CBS Moneywatch that Puerto Rico should be able to seek bankruptcy protection, and he plans to introduce legislation along those lines. "For close to 50 years I have been advocating for the people of Puerto Rico to be treated truly like real American citizens," he said.
Nearly four decades ago, Rangel was the principal author of the so-called 936 program, which provided federal tax incentives to American multinationals, particularly in the pharmaceutical sector, to set up production plants in Puerto Rico. "I saw that, when we had that in place, we started to see the building of a middle class with good paying jobs," he said.
The incentive program, first on the books in 1976, exempted corporations from paying federal taxes on the profits generated by their Puerto Rico-based subsidiaries. Congress ended the program in 1996, but provided a 10-year extension for U.S. companies already on the island. Once the program ended, however, big companies largely left the island and unemployment spiked.
Rangel believes the crisis in Puerto Rico requires President Obama to intervene, noting what he sees as a long-festering injustice in the commonwealth arrangement.
"In battle after battle generations of Puerto Ricans have distinguished themselves in combat defending the United States," he said. "You shouldn't have citizens that can die for your country but not able to vote for the country's President. The only thing good out of this economic disaster is that somebody is going to have to start paying attention."



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