SAN JUAN, March 10 Ingrid Rivera is well aware
of Puerto Rico's plan to borrow $3 billion from Wall Street on
Tuesday, which has been front-page news in almost every local
newspaper. She just doesn't expect it to do any good.
"I have no hope that things will improve soon. I've been
unemployed two years and nothing has changed," said Rivera, 43,
who last worked as a general manager of a company staging
educational exhibits. "I'm thinking of leaving and starting my
life elsewhere. I'm telling myself it's time to go before I get
Rivera has seen her opportunities shrink with an economy
that has been in recession for almost eight years and has seen
crime rates and social problems soar.
Told she is over-qualified for the few jobs on offer at
recent San Juan job fairs, she is considering a move to Miami,
joining an exodus of the young and the educated, which is adding
to economic problems of the Caribbean island, a U.S. territory.
In 2011 alone, Puerto Rico lost 1.5 percent of its
population, and economists say the ongoing exodus has reduced
its gross domestic product by some $3 billion in the last
decade. Its unemployment rate as of December was above 15
percent, worse than any U.S. state.
Few think borrowing more money from Wall Street will save
Puerto Rico. In fact, hope that the commonwealth can turn things
around without restructuring its $70 billion in debt - a move
akin to filing for bankruptcy - is hard to come by.
About 81 percent of Puerto Ricans polled recently by El
Nuevo Dia, the island's largest newspaper, said they expected
the economy to get worse this year, while nearly half said the
quality of life is "bad to terrible."
The dire situation has many on the island wondering if the
federal government will come to the rescue, something the Obama
administration has repeatedly said is not in the cards
"I think federal action is not out of the question because
circumstances are evolving rapidly. I think it is an actual
possibility," said attorney Andres Lopez, the head of the island
chapter of the Federal Bar Association, who headed President
Barack Obama's campaign in Puerto Rico. "There has never been a
crisis like this before in Puerto Rico's history."
For now, though, that is more hope than reality. Lawmakers
in Washington from both parties would probably block any effort
to send a formal aid package to Puerto Rico, and Treasury
officials have said repeatedly that the administration is not
contemplating federal aid.
Puerto Rico cannot file for bankruptcy protection under U.S.
law. Still, its Government Development Bank last week hired a
renowned restructuring expert. And documents for Tuesday's bond
sale included the radical disclosure that it is looking into
emergency measures that resemble bankruptcy.
Despite all the troubles, Wall Street has been eager to lend
to it because the interest earned on Puerto Rican debt is exempt
from local, state and federal taxes, making its bonds attractive
to many investors.
HOW LONG WILL THE MONEY LAST?
The government has tightened its belt in recent years by
raising taxes, cutting spending and revamping its public pension
system, a reform that is still partly under court review.
It says it will use the proceeds from this week's bond sale
to refinance part of its outstanding debt load and give it
much-needed cash to meet its obligations.
But the money isn't likely to come cheap. Indications on
Monday are that investors will demand a return of more than 8
percent, less expensive than initially feared but still higher
than most U.S. states pay to borrow.
Angel Rosa, a senator from Puerto Rico's ruling Popular
Democratic Party who voted against legislation to enable this
week's bond sale, said the government would be better off biting
the bullet and renegotiating some of its debt.
Carlos Matos, who works in the consumer products field in
San Juan, said the bond sale amounted to the government putting
off difficult decisions.
"They say the money is going to last for two years," he
said, "but I don't see how it will last six months."
Rosa said federal intervention is warranted because the U.S.
Treasury phased out tax breaks for the parent companies of
Puerto Rico-based U.S. manufacturers at the end of 2006. Puerto
Rico entered recession that year and has yet to recover.
"A lot of what is happening economically in Puerto Rico
today has to do with the decision," he said.
While Rosa sees little chance of a replacement for the
federal tax break, he believes Puerto Rico should be able to get
a low-cost loan from the Federal Reserve or other entity to help
Puerto Rico through its fiscal situation.
It is unclear that the Fed has the authority to extend such
a loan. The Dodd-Frank Wall Street reform act allows the Fed to
extend emergency credit only through a program with "broad-based
eligibility" used "for the purpose of providing liquidity to the
Puerto Rico's economic woes, while serious for the island,
are not seen as posing a systemic risk to U.S. banks or the
broader financial system.
Puerto Rico does get its share of federal help. Its largest
revenue source last month was an excise tax on foreign
corporations that some have styled a "backdoor bailout" because
the U.S. firms that pay the tax can claim it as a credit on
federal tax returns.
Federal benefits such as Social Security also provide a
substantial amount of income, something that Fitch Ratings says
underscores the weakness of the island's economy. According to
the most recent U.S. Census data, net inflows from Washington
were $12.2 billion in 2010, nearly a fifth of the island's gross
domestic product that year. That was up from 13 percent of GDP
Puerto Rico's current budget relies on $9.77 billion of its
own revenue and nearly twice that amount - $19.2 billion - in
Add in the widespread aversion to municipal bailouts in
Congress and this is why federal help for the Puerto Rico
government is the longest of long shots, said Sergio Marxuach,
public policy director at the Center for a New Economy, an
island think tank.
Better, he said, would be a restructuring of Puerto Rico's
public corporations, which run toll roads, power systems and
other services and together account for about $50 billion of the
island's outstanding debt.
THE 51ST STATE?
Joining the union as the 51st state would solve many of
these debates. A bill introduced in the U.S. Senate last month
proposes asking Puerto Ricans whether they want to be admitted
to the union as a state. But it faces opposition in Washington
and is seen as unlikely to pass.
In a budget proposed last week, Obama set aside $2.5 million
for voter education and a plebiscite on Puerto Rico's status and
$85.3 million for a Federal Bureau of Investigation building in
San Juan. But Congress is unlikely to approve the budget.
Regardless of the island's political future, attorney Lopez
said talk of a messy debt restructuring could increase pressure
on the U.S. government to limit the damage.
"Federal intervention is not a certainty but it is a
possibility," he said. "Who is to say what will happen six
months down the road?"
Residents like Rivera, though, have all but given up hope.
The U.S. government, she said, is in no position "to splurge on
spending more money here. With all these people here relying on
financial aid from the federal government, that is more than
enough. We dug our hole, and this is where we are."
(Reporting by Reuters in San Juan; additional reporting by Lisa
Lambert in Washington and Michael Connor in New York; editing by
Steven C. Johnson and Leslie Adler)