Both debt crises show striking parallels in their causes and devastating effects -- should bankruptcy be an option?
By Bob Hennelly
A homeless man sits at the entrance
of Greece's former Ministry of Education and Religions, now abandoned,
where he found a temporary shelter in the center of Athens on March 27,
2015.
LOUISA GOULIAMAKI/AFP/Getty Images
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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