As Puerto Rico Nears Record Default, Island Complains to U.N. That U.S. Violating Sovereignty Rights

December 30, 2015


Edwin Meléndez

director of the Center for Puerto Rican Studies and professor of urban affairs and planning at Hunter College in New York.

Puerto Rico is just days away from the biggest municipal bond default in U.S. history, and Congress is doing nothing to stop it. The U.S. territory faces a January 1 deadline to pay bondholders around $1 billion, a fraction of the $72 billion it owes overall. Puerto Rico has warned it will be unable to make at least some of its upcoming payment, and what it can pay could be drawn from funds it doesn’t actually have. Congress could have prevented a default, but passed on their opportunity earlier this month. The governor of Puerto Rico has complained to the United Nations that the United States is backtracking on its promises of self-government on the island. We are joined by Edwin Meléndez, professor of urban affairs and planning at Hunter College and the director of the Center for Puerto Rican Studies, as well as Democracy Now! co-host and New York Daily News columnist Juan González, who has extensively covered the Puerto Rico debt crisis.


This is a rush transcript. Copy may not be in its final form.

JUAN GONZÁLEZ: Puerto Rico is just days away from the biggest municipal bond default in U.S. history, and Congress is doing nothing to stop it. The U.S. territory faces a January 1st deadline to pay bondholders around a billion dollars, a fraction of the $72 billion it owes overall. Puerto Rico has warned it will be unable to make at least some of its upcoming payment, and what it can pay could be drawn from funds it doesn’t actually have. The island has already slashed public spending in a bid to meet its obligations.

Congress could have prevented a default, but passed on their opportunity earlier this month. Before going into recess, the Republican-controlled Senate rejected an Obama administration proposal that would have extended bankruptcy protection to Puerto Rico. Puerto Rican leaders tried to lobby Congress, but they came up against powerful foes. Wall Street firms have lent Puerto Rico over $3 billion, and they and other creditors have funded a major lobbying effort to help defeat bankruptcy proposals. Now Republicans say that any financial rescue for the island might not happen until late March at the earliest.

AMY GOODMAN: The Puerto Rican governor, Alejandro García Padilla, has long warned the U.S. territory is in a death spiral and that the $72 billion in debt is unpayable. Over the weekend, García wrote to United Nations Secretary-General Ban Ki-moon complaining the federal government is backtracking on the sovereignty rights granted to the island’s residents when the Commonwealth of Puerto Rico was created in 1952. In the letter, García Padilla also blasted a legal opinion on his island’s political status that the Obama administration filed last week in a case before the U.S. Supreme Court.

In the brief, Solicitor General Donald Verrilli Jr. describes in stark terms the total control Congress exercises over territories like Puerto Rico. He wrote, quote, "In the Territories of the United States, Congress has the entire dominion and sovereignty, national and local, Federal and state, and has full legislative power over all subjects ... and may, at its discretion, intrust that power to the legislative assembly of a Territory." Verrilli goes on to write, quote, "the extent of the power thus granted is ... at all times subject to such alterations as Congress may see fit to adopt."

Well, for more, we’re joined by Edwin Meléndez, professor of urban affairs and planning at Hunter College and the director of the Center for Puerto Rican Studies.

Puerto Rico is on the verge of the largest bankruptcy in U.S. history. It’s supposed to pay $1 billion on January 1st. What’s going to happen?

EDWIN MELÉNDEZ: Well, it is really in default already, because they have been using reserve and calling back money from various agencies. So the projection is that they will only be able to cover part of that debt, perhaps about one-third of it, that has some kind of legal priority over other types of debt. The problem with that is that once that happens, there’s going to be a legal case against the commonwealth and all the agencies that issue that debt, and you will have a very messy process of who’s in line first and what kind of moneys are you going to be using to pay for that. At the end of the day, there are some creditors that have very low priority—for example, pension funds from government employees and so forth, that right now are in limbo. They have no priority in the line, and no one is protecting them. And the only thing that can really include those creditors will be a bankruptcy process that is orderly and already structured. Any other type of restructuring will run into the problem that there are no legal precedents for this, so it will be somewhat arbitrary, and it’s going to be a never-ending legal battle for who’s going to get paid first. So, we’re heading towards a somewhat legal messy situation. In about a week, we’ll know exactly where we are.

JUAN GONZÁLEZ: And even if the island does pay that portion of that debt every month after that, there’s going to be another payment due until—I think it’s in July; something like $2 billion is due in July—so that this is going to be an ongoing process—

EDWIN MELÉNDEZ: Yeah, there will be—

JUAN GONZÁLEZ: —of the unpaid debt mounting.

EDWIN MELÉNDEZ: Yeah, there will be no contributions to reserve, which is a de facto default already in many of the—for many of the creditors. But more importantly, this is a government that is operating without liquidity, because they already are in the junk bond territory. So they can’t issue that to operate, to finance projects and what have you. Everything has to be renegotiated with some kind of creditor, and that’s a problem, because, you know, they are not paying back taxes, reimbursements that they owe to the public, they are not paying creditors that offer services to the government that have to be paid for those businesses to survive and continue providing those services. You have a liquidity shortage on the Medicare/Medicaid side and the health system. So it’s all going to converge at some point. And someone will have to do something, whether the president or Congress.

AMY GOODMAN: Juan, you’ve just written about this in the New York Daily News, and you are constantly speaking about it and writing about it. What do hedge funds and Wall Street have to do with this debt and the default?

JUAN GONZÁLEZ: Well, what’s happened is, you know, obviously, the largest—the last bond issue that Puerto Rico took out was in 2014, about three-and-a-half billion dollars, and that was largely bought up by hedge funds, because no one else—no other investors were willing to take a chance on Puerto Rico debt, knowing what bad shape the island was in. So it was at a very high interest rate. And the hedge funds insisted on guarantees that its debt would be—their debt would be paid before any other debt, and if there was any legal issues to be resolved, they would be resolved in a New York court, not in a Puerto Rico court. So they put in all these safeguards to put their debt at the front of the line. So that’s why hedge funds right now are in the position, if the government does default, that they have, they believe, the best legal protections to go into court and insist that their money get paid first, if that means cutting teacher salaries, closing schools, doing whatever needs to be done to get their debt paid. And that’s why I think what Edwin is saying, that the issue of having an impartial judge adjudicate all of the debt of the island, not just the $72 billion owed to bondholders, but, as you say, Edwin, there’s $40 billion of unfunded liabilities to pension funds. So, really, Puerto Rico is facing over $100 billion in debt, of which $72 billion is owed to Wall Street investors, for the most part, and then the other $40 billion to its own employees.

AMY GOODMAN: So what does the Supreme Court have to do with this?

JUAN GONZÁLEZ: Well, the interesting thing is—and I think Edwin is aware of this—there are now two cases that the Supreme Court will decide in this term, by June, that have to do with the status of Puerto Rico. One is that the government of Puerto Rico, knowing the problems it had because Congress is not allowing it to have bankruptcy protection, it passed its own bankruptcy law. And in 2014, the hedge funds went to court and said, "No, no, no, Puerto Rico does not have the legal authority to do its own bankruptcy law." And they got the federal courts to—the lower courts to say, "Yes, that’s true. It’s illegal for Puerto Rico to establish his own bankruptcy protection." But now, the Supreme Court has agreed to hear that case.

And the briefs that Governor García Padilla mentioned over the weekend was a brief filed by the Obama administration on another case, a criminal case. And this is interesting, because the colonial relationship of Puerto Rico turns out to be related to virtually everything that happens on the island. And this was an arms case. The government of Puerto Rico arrested two men for selling, illegally selling, guns on the island of Puerto Rico a few years ago. The federal government then stepped in and arrested the same men on federal gun trafficking charges. The men pled guilty to the federal charges. Puerto Rico said, "Well, wait, we still have the original arrest. We’re going to prosecute them according to our laws." They said, "No, this is double jeopardy. You can’t try us twice for the same crime," which can be done—a state can try someone for a crime under state law different from federal law. But in this particular case, the Justice Department sided with the convicted men and said, "No, this is double jeopardy. Puerto Rico does not have sovereignty. It does not have the sovereign right to have laws separate and apart from those of the United States."

And so, that’s why the Obama administration has now basically said, in the starkest terms we’ve ever heard, Congress has complete control over the island of Puerto Rico. Any laws that Puerto Rico has on the books now, any rights that it has, it’s only because Congress gave it to Puerto Rico, and at any time Congress can take those laws and those rights back and can change them. So this is probably the clearest statement that any administration has ever made about the colonial status of Puerto Rico, which is why García Padilla then decided, "OK, you want to say that? Well, then I’m going back to the United Nations, because in 1952, when you established the Commonwealth of Puerto Rico, you told the U.N. that Puerto Rico was no longer a colony, because you had granted it self-government, you had granted it its own autonomy." And so, now, basically, what García Padilla said, "Hey, Ban Ki-moon, they were either lying then or they’ve changed their position now, but the United Nations needs to take a look at this."

EDWIN MELÉNDEZ: It is definitely sort of an interesting situation, in many ways, because next year there are going to be all kind of pressures. For example, they are taking money from the tax—the taxes that they collect to pay some kind of bonds to pay another kind of bond, which the secretary of justice already said it’s probably illegal. And so, we’re going into uncharted territory, whether the cases are bankruptcy or the legal precedents, not to talk about what’s going to happen this summer with the funding for healthcare and so forth. So, we’re reaching a situation where all these questions about the territorial status and how do we solve problems in Puerto Rico are coming to the forefront.

JUAN GONZÁLEZ: But, you know, the interesting thing, I think, Edwin, in this particular case is, for the first time in American history, there’s these two—these two cases in the Supreme Court will be heard by a court—

EDWIN MELÉNDEZ: Right, right.

JUAN GONZÁLEZ: —that includes—

EDWIN MELÉNDEZ: A Puerto Rican, yeah.

JUAN GONZÁLEZ: —a Puerto Rican, who knows more about this, probably, because she studied it for her master’s thesis in Princeton, her—

EDWIN MELÉNDEZ: Right. Right, right, right.

JUAN GONZÁLEZ: I mean, her senior thesis in Princeton and then her master’s thesis in Yale were both on the Puerto Rico status issue.

EDWIN MELÉNDEZ: Right, right.

JUAN GONZÁLEZ: And so, Sonia Sotomayor, I’m sure, will have a big part in the conversation among the justices about how to handle this case.

EDWIN MELÉNDEZ: Right, absolutely, and I’m sure she will be a very influential voice on this, all this situation.

AMY GOODMAN: Well, putting this into presidential politics, The New York Times published this long investigation earlier this month on the Puerto Rico debt crisis. And among its findings was how pressure from the hedge funds have successfully influenced lawmakers. For example, presidential candidate Florida Senator Marco Rubio had explored sponsoring bankruptcy legislation for the island earlier this year. His staff even helped draft some of the legislation. But this summer, after attending a hedge fund campaign fundraiser, Rubio changed his position and said bankruptcy should be considered only as a last resort. Now, among the various mutual funds involved with Puerto Rico are Oppenheimer Funds, Franklin Templeton, and hedge funds, some specializing in distressed debt—the D.E. Shaw Group, Angelo Gordon, along with Marathon and BlueMountain. The significance of this?

EDWIN MELÉNDEZ: Well, one aspect of this is that in past years this would have probably gone unnoticed or probably, you know, under the door, but now you have a Puerto Rican diaspora in Orlando that is pretty active. They have been picketing and rallying and calling on Marco Rubio about this issue. So, now the Puerto Rican case is getting into presidential politics and local politics in Florida. It’s not just Marco Rubio. It’s a whole host of elected officials that are on call in Florida, Pennsylvania, Ohio and Chicago, that is up for a Senate race, and so forth. So, all of the sudden, Puerto Rico becomes news. And so, Marco Rubio may switch position, but it’s not going to go unnoticed. And there is a group of people there that are calling him out.

AMY GOODMAN: And there’s a huge Puerto Rican community in Florida.

JUAN GONZÁLEZ: Well, you’ve documented the growth—

EDWIN MELÉNDEZ: Yes, yeah, right, right, right.

JUAN GONZÁLEZ: —of the Puerto Rican community in Florida that most people are not aware of. Your center has.

EDWIN MELÉNDEZ: Yeah. In about a decade, they have doubled for—slightly more than 500,000 to over a million. And that’s very significant because, you know, you know Puerto Ricans vote. The people that come from Puerto Rico have an intense voting practice. How do you convert that to local politics is what the advocacy coalition in Florida is trying to figure out. But they are figuring out, and they’re very active on this issue.

JUAN GONZÁLEZ: I want to turn to a clip from earlier this year when Puerto Rico’s Governor Alejandro García Padilla gave a televised address calling on the hedge funds to come to the negotiating table.

GOV. ALEJANDRO GARCÍA PADILLA: [translated] Now, the most important conclusion from this plan is that even if we impose all the measures in it, it would not be sufficient to meet the needed equilibrium. The massive public debt of Puerto Rico is an impediment to growth. That’s why the time is now that the creditors come to the table and share the sacrifice.

JUAN GONZÁLEZ: Edwin Meléndez, your sense of how willing the hedge funds are right not to share the sacrifice?

EDWIN MELÉNDEZ: Well, if you go by past behavior, for example, in the Argentina case, these people were reluctant to negotiate any restructuring of the debt. And, in fact, they held—and they held a lot of the Argentinian efforts in New York courts. So, based on that behavior, my probably prediction will be that they will be very hesitant to negotiate this.

Right now, in a few days, we’re going to see that those who have some constitutional priority are going to be paid, probably, to avoid the legal consequences for the government, because it will be even more messier. So I think it’s a strategy, whether by design or by circumstances, that will force some resolution from outside, because at the end of the day the only people that can really resolve this is Congress. I think Treasury and the president have some mechanisms to mitigate and try to bring the creditors and debtors to the table. But at the end of the day, forcing them to accept a deal, it’s not in the cards unless they want to do that. And why would they?

AMY GOODMAN: We’re going to have to leave it there, but we will continue to follow this, of course. Edwin Meléndez, director of the Center for Puerto Rican Studies and professor of urban affairs and planning at Hunter College in New York. And, Juan, we’ll link to your speech that you gave at New York University at the Juan Carlos Center about the Puerto Rican debt.

This is Democracy Now! When we come back, it’s being called the nation’s biggest environmental disaster since the BP oil spill, a runaway natural gas leak above Los Angeles. We’ll be joined by Erin Brockovich. Stay with us.

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