This article was published by The McAlvany Intelligence Advisor on Monday, June 12, 2017:

Ever since he announced his campaign for governor of Puerto Rico, Ricardo Rossello, who was installed as the island’s new governor in January, has been pushing for statehood. Offloading his country’s financial problems onto American taxpayers is the American way. By gaining statehood, Puerto Rico would be poorer than Mississippi, the poorest of the American states, and therefore would be the likely recipient of federal largesse by the truckload. As Rossello said so clearly, “The plebiscite has to be for a future solution to the status issue … this goes to the roots of what it means to be an American, what it means to be part of a nation that shares the same democratic values, human rights, [and] freedom.” He didn’t finish the sentence: statehood would also go a long way to solving the island’s fiscal problems by “sharing” them with American taxpayers. There would be increases in funding, there would be benefits, tax credits, unemployment insurance, and a whole raft of other federal programs that aren’t currently available to the territory. Appropriately, the governor’s political party is called the New Party.

Puerto Rico has been digging itself into a financial black hole for decades, thanks to Congress’s allowing the island’s bonds to be triple-tax-exempt – no federal, state, or local tax for wealthy Americans seeking interest income from bonds. That insatiable appetite only increased with the Fed’s ZIRP program following the real estate collapse. Today the island owes more than $122 billion, made up of bonds and unfunded , more than twice the island’s total economic output in a year. It has lost 20 percent of its jobs and 10 percent of its population just since 2007, and half of the island’s remaining population lives in poverty.

When the island’s government defaulted on a billion dollar payment last year, it got the attention of various bondholders. When it reached a crisis, the administration and the Congress (sometimes it’s hard to tell which is which) decided that, rather than grant the island the opportunity to declare and settle its problems on its own, it would create a commission to “study” the problem. The commission made numerous suggestions, including pushing the government to talk the bond holders into settling their claims for less than face.

When Puerto Rico’s then-governor offered to settle at 67 cents on the dollar, the commission came back and told him it was too generous. So he came back with an offer at 50 cents, but Oppenheimer and Vanguard, the biggest holders of the now junk-rated paper, said that was too severe. So, in May, the commission put the island into de-facto bankruptcy, handing the island’s financial future over to a federal bankruptcy judge.

It isn’t like this is a new idea for the island. In fact, Sunday’s plebiscite is the fifth effort since 1967 to ask Congress for permission to become a state. The first three times statehood failed to get a majority, and the fourth time the vote was marred by protests of half a million voters boycotting the election over claims that the ballot was rigged in favor of statehood.

No matter how Sunday’s vote turns out (this is being written a few hours before the polls close on Sunday afternoon), it really doesn’t matter. The voters have three choices: stay as a U.S. territory, seek to gain statehood, or become an independent sovereign nation. Even if statehood passes, it won’t go anywhere, for the most obvious of political reasons. Puerto Ricans are notoriously , voting themselves generous pensions and other benefits using those borrowed funds that Americans continued to throw at them. If PR were to become a state, it would send two Senators and five Representatives to Washington. This is hardly the time when such a move would generate much enthusiasm among Republicans.

There are other interests watching Sunday’s results closely, including some insider vulture funds run by establishment types. Right after the credit rating agencies reduced the island’s bonds to junk status, vulture funds swooped in to buy up many of the island’s heavily discounted bonds, hoping/thinking/planning/expecting to reap a windfall when the U.S. taxpayers finally bailed out the island and paid off the bonds at face value. The names of those vulture funds should be familiar: insider John Paulsen’s Paulson and Company, David Tepper’s Appaloosa Management, Marathon Asset Management, Blue Mountain Capital, and Monarch Alternative Capital. Each has serious ties to and makes their living buying low and selling high, especially the bonds of failed or failing states like Puerto Rico.

Their chances of such a windfall aren’t bright, and their chances of even coming out whole following the bankruptcy trial about to take place are dubious.

Happily, no matter what the final vote count is on Sunday, statehood is just a dream for the socialist governor looking to hang the millstone of his island’s problems around the neck of the U.S. .

UPDATE: Puerto Ricans voted overwhelmingly for statehood on Sunday, with 97 percent of those voting supporting US statehood. However, turnout was only 23 percent as a result of the voter boycott, which undermines the vote’s legitimacy.


Sources:

The Daily Bell: Wrong Way! Why Would Puerto Rico Want to Become a State?

The Wall Street Journal: Puerto Rico to Vote Sunday on Statehood

Miami Herald: Many Puerto Ricans crave statehood — but the timing couldn’t be worse

Reuters: Divided Puerto Ricans head to polls to vote on U.S. statehood

The Blaze: How Puerto Rico’s vote on Sunday could change the future of America forever

History of Puerto Rico

Background on ZIRP

 

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