Anyone who follows the news periodically, if not more often, wonders about the criteria making certain issues or persons “newsworthy,” and others substantially less so. One reliable indicator of newsworthiness is that the story happens in Washington, D.C. A second is an unusual or counter-intuitive event (“Man bites dog”). A third is the prospect of large losses. This last quality, however, renders the relative neglect of Puerto Rico’s debt crisis an interesting anomaly.
To get a sense of this conundrum, let us reflect back on the extensive coverage preceding Detroit’s Chapter 9 bankruptcy this past July. At the time of its filing, Detroit was a city of 700,000 persons, down from 887,000 as recently as 2005, and 1.2 million in 1980. The mass media began to cover the story months before the city’s formal declaration of bankruptcy. A common feature of these stories was that Detroit’s filing was by far the largest muni-debt bankruptcy in U.S. history, with an estimated $18 billion on the line (Jefferson County, AL and Orange County, CA were a mere $4.2 and $1.6 billions respectively). We saw numerous stories about the demise of a once-great city, the politics surrounding the payment crisis, and a fairly robust investigation into the plight of the city’s pensioners, residents, home owners, and sundry other stakeholders.
By contrast, Puerto Rico has a much larger population with approximately 3.7 million residents. As with Detroit or any other location under economic pressure, its population has been shrinking rapidly, by about 1% per annum since 2010. This is not too surprising since Puerto Rico’s GDP has only recently begun to stabilize after contracting in every year since 2006. A large portion of this contraction is due to greatly reduced levels of investment and construction, along with stagnating “exports” to its primary trading partner, the United States. Unsurprisingly, its “headline” unemployment rate is 15.4%, much higher than any state in the Union. While I have not become aware of any substantive data on the demographics of those who have left and those who have stayed, similar economic stresses across other cities and regions make it safe to presume that those who have departed are younger, more educated, and more employable.
As to the crisis itself, depending upon whom you read, somewhere between $55 and $70 billion of municipal or “muni” debt is at risk of default. Of this, just shy of $1 billion must be paid out or refinanced over the next month. In light of the market’s bearish turn on Puerto Rican debt, this will be neither easy nor cheap. As an index of market sentiment, consider that yields on Puerto Rico’s 20 year bonds, which were around 5% as recently as May, have now surged to over 10%. The market’s sense that Puerto Rico’s debt load is unmanageable was given additional impetus this past week when S&P and Moody’s downgraded the ratings on the Commonwealth’s bonds to “junk.”
With its population and economy shrinking, yields on its debt increasing, tax levels rising, businesses struggling, and bond market sentiment becoming notably bearish, Puerto Rico is in a terrible bind. To add to its woes, legal opinion currently holds that as Puerto Rico is not a sovereign government, it most likely does not have the legal authority to file for bankruptcy. Such an inability means that it cannot use the threat of a filing to garner leverage in working out terms with its creditors, and it cannot count on an informal deal freeing it up from predations by “vulture funds.”
Given all of the above, why is this story not more newsworthy (a late exception is this Sunday’s New York Times)? If we merely consider the size of the problem, it should be evident that more people will be directly afflicted by cuts in government services, lower pension payments, and a weakened labor market, etc., than occurred as a consequence of the collapse of Detroit’s or Jefferson County’s finances.
To be certain, some stories have appeared – almost all of them in the business press. The “angle” has been almost entirely on the financial side – the ratings downgrades, the outlook for investors, the efforts on the part of the government of Puerto Rico to balance its budget, etc. Again, with a few exceptions, we have not seen any “personal interest” or “man on the street” articles featuring interviews with pensioners, residents, small business owners, school officials contemplating more budget cuts, or individuals contemplating migration to the New York, Miami, or elsewhere.
I would speculate that part of the reason for the coverage gap is the absence of two U.S. Senators and a handful of Representatives. Representation in Congress would make this a Washington story, and thereby “on the radar” of all political reporters and most newspaper editors. Another reason may be related to Puerto Rico’s quasi-sovereign status.
Or, is it that we are becoming accustomed to such stories? Perhaps we have quietly given up on the notion that the United States is or should be a first-world nation with the ability, capacity, and obligation to ensure that all of its states and territories have the wherewithal to support a decent standard of living. If the latter is true, then the lack of interest in the prospects facing the people of Puerto Rico is just one more signal that plutocratic values and perspectives are increasingly dominating our politics and media.
Another possible reason why Puerto Rico’s current meltdown is getting so little attention: the inconvenient Cuba connection.
We’re still living, here in 2014, within the classic Cold War narrative. Cuba, in this frame, will always be an unmitigated socialist disaster for the poor souls unlucky enough to still live there. If only Cuba embraced the Land of the Free and its free-market ways, this stance holds, Cuba could be a tropical paradise.
Just like Puerto Rico?
Congressman Pedro Pierluisi would be chagrined to know that he is not the representative of Puerto Rico. On May 15, 2013, he filed a bill, HR2000, to make Puerto Rico the 51st state, which could help with this crisis, at least by allowing them the legal right to declare bankruptcy.
Probably the reason for the lack of publicity is that Puerto Ricans don’t have the same cachet within the New York – Washington power axis that the formerly grand American auto industry has.
Thousands of various sovereign/non sovereign government entities have been declared debt crisis situations.. maybe to the point the news media has been desensitized to even finding it a major news item?..given the horrible analysis of cause and effect maybe its not all bad. Nevermind countries such as Greece joining the EU fall into receivership due to giving up central bank functions while the mass media portrays the situation as too much spending in the public sector. Without reading one news report about the the debt crisis in Puerto Rico.. bets on the media portrays the situation as a bloated public sector sucking away the private sectors ability grow the economy. Nevermind Puerto Rico does not have a central bank
The news is always created by the last man to hold the pencil!
? isn’t most of this debt underwriten by credit default swaps ?
Thanks, Robert, for calling attention to this story. I have a question which you may or may not be able to answer. I assume Puerto Rico uses the US dollar. As a user, Puerto Rico would not be a monetary sovereign, but neither is Detroit, Jefferson County, nor Orange County; yet all three have filed for bankruptcy. Does the sovereignty you refer to have a different meaning than the sovereignty of a state or a chartered subdivision of a state? If Puerto Rico is not sovereign in the sense a state is, doesn’t that obligate the US government to back its bonds?
Two possible reasons for the lack of coverage that immediately:
2) Creditor bias – you actually fall into this bias yourself (as do most economists) when you distinguish as’economic stories’ coverage of default, interest rates, etc., and ‘personal interest stories’ those of the debtors, citizens, unemployed and poor. Why are the latter NOT economic?
It is not covered because Puerto Rico is conceived of by Americans as foreign. While Americans feel like a brother-in-arms is at risk in Detroit, the lack of empathy is revealed by coverage restricted to the interests of bondholders.