Sat | Jan 19, 2019

Jamaica, Puerto Rico, Greece and Spain – United in debt

Published:Friday | July 3, 2015 | 12:00 AM
Governor of Puerto Rico Alejandro Garcia Padilla.

There is an unflattering similarity among these four countries - Jamaica, Puerto Rico, Greece and Spain - that is extremely topical this week. It is the size and severe financial burden of each's national debt.

While each country's debt, economic environment and repayment arrangements are different and are evolving in different directions, three events have brought these four countries' debt problems into sharp focus in Jamaica this week.

First, the recent visit of the Spanish secretary of state for international cooperation, who told us in banner headline that 'Austerity works'.

Second, the unequivocally clear announcement by Puerto Rico's governor that his country 'can't pay US$72-billion debt'.

And third, the bubbling Greek-European Commission-IMF-ECB impasse involving endless negotiations and pushed-back deadlines, finally arriving at its eventual denouement - a solid 'no' to more troika-driven austerity, and an equally immovable 'keep your word on reforms' from the Tsipras-vilified troika.

Probably the most eye- and ear-catching of the three was the Puerto Rican announcement. Of the four countries, it has the lowest debt-to-GDP ratio. Puerto Rico's ratio is about 70 per cent - the publicly held portion of the US national debt-to-GDP ratio is slightly higher at 74 per cent.

Spain recorded 93.9 per cent in 2013 but is expected to reach 100 per cent debt-to-GDP figure for 2015. Jamaica's is about 138 per cent and Greece's debt is 176 per cent of GDP.

Yet, it is Puerto Rico that has made the clearest statement about its debt repayment probability. Governor Alejandro Garcia Padilla said his country's debt is 'unpayable', according to The New York Times.

Mr Padilla is quoted by the BBC as saying: "Even if we increase revenues [Puerto Rico has a terrible tax collection record] and cut costs [it has a very bloated, unproductive and inefficient bureaucracy], the magnitude of the problem is such that we would not resolve anything given the weight of the debt we're dragging. The only way we'll get out of this hole is to join forces and agree, including bondholders, to assume some of the sacrifices".


Given its special territorial status, Puerto Rico lacks the legal tools that US municipalities and independent countries that are not in monetary unions like those in the eurozone can use to restructure their debts. As a commonwealth, it is excluded from Chapter 9 of the US bankruptcy code. It also cannot devalue its currency - the US dollar - nor can it seek help from the International Monetary Fund.

When the island's governor makes the call to bondholders to 'join forces and agree to assume some of the sacrifices', he is calling for a 'bailing in' of the lenders. There is no bailout to be had from Obama's Washington. Padilla is referring to a haircut on lenders' bond assets, even as he promises 'pain' to his fellow citizens who are the shareholders, or equity investors, in this instance.

'Bailing in' is a concept that gained currency in the Cyprus banking crisis when Chancellor Merkel of Germany flatly refused to bail out Russian oligarchs and their fellow national depositors and investors, some of whom were reported to have secured their wealth from questionable sources. Depositors - lenders to the Cypriot banks - investors and shareholders had to bear the pain with some sharing by taxpayers.


The Puerto Rican leader had to use the bailing in approach because he has so few options. He has also put a most uncomfortable issue and question on the table and in the public square. It is this: If Puerto Rico with such a relatively small debt-to-GDP ratio and its US links cannot pay its debts, how can countries with ratios substantially above the 100 per cent mark like Portugal - 129 per cent, Italy - 132.6 per cent (both figures for 2013), Jamaica - 138 per cent and Greece - 176 per cent, repay their huge debts?

Financial institutions and bondholders which hold these countries' debts will be seeking quantified and constant reassurance from the economic and political managers of these countries. Needless to say, they will be watching the Greek referendum with elevated anxiety.

Puerto Rico, with its high energy cost at 26 cents per kilowatt-hour, is twice, or more, as expensive as states on mainland USA, but is similar to Jamaica's. Puerto Rico's inability to collect as much as 44 per cent of its 'sales and use tax' and its inefficient government makes the two islands comparable.

While Greece is in the Eurozone and, like Puerto Rico, up to now, is unable to devalue its currency, it is like Jamaica in that its economy is dependent on tourism, its manufacturing base is denuded, it badly needs pension reform, it has high and maybe unmanageable debt, and its government is seen as terribly bureaucratic and inefficient.

Jamaica is very different from Spain in that the latter country recently spruced up its well-established manufacturing base. Regrettably, our Government seems to manufacture Novel hurdles regularly for our manufacturers and exporters to scale. Spain also, unlike Jamaica, instituted significant labour reforms that made it efficiency-competitive with Europe's best, Germany.

Still, it has a possible distasteful-to-lenders and troika similarity to Greece. Two of Spain's fastest-growing political parties, Podemos and Ciudadanos, are of the protest and anti-austerity variety - like Mr Tsipras' Syriza party in Greece. They have support from about 25 per cent of Spanish voters.

With these waiting in the wings, it is easy to understand why the IMF, EC and ECB will be very reluctant to cut 'insolent' and 'disrespectful' and leftist Alexis Tsipras any more slack.

Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the Economic Advisory Council of the Opposition Leader.


Twitter: @hillaubyn