Puerto Rico has a poverty rate of 45%. Water rationing and electricity black outs have swept the island. Teachers are being fired as schools close and essential services are being pared from the government budget. Adding to this chaos, tens of thousands of people are fleeing.
From that description, it might seem that Puerto Rico, a US territory, is reeling from a war or a climate disaster. But in reality, these crippling events are the result of a debt burden fueled by vulture hedge funds. The territory's debt has grown so large--$70 billion USD, more than double their GDP--that the island has no way of paying it off.
The normal reaction to this situation would be to restructure the debt and reduce the burden. But Puerto Rico is subject to unusual regulations that created the conditions for massive debt in the first place and then made it impossible for the island to emerge from it.
And thanks to John Oliver, millions of people now know all about this complicated subject.
Beginning in the 1970s, Puerto Rico began to attract corporations with advantageous tax rates that the US allowed to spur investment. For years afterwards, corporations flocked to the island to do business, creating many, many jobs and lots of economic activity.
This special tax rate expired in 2006, when flickers of the global financial crisis started to appear. Corporations left, causing widespread job losses and falling tax revenue.
To make up for this hemorrhaging, Puerto Rico began to take advantage of another law that applies only to the island. For some reason, the government can sell municipal bonds, which are like IOUs with interest rates, that are exempt from federal, state and local taxes to raise money.
These bonds sold rapidly and hedge funds in particular saw an opportunity to cash in big time.
As the global recession deepened, Puerto Rico used these bonds to conceal structural problems in its economy. During the financial crisis, the federal government bailed out numerous states--most notably Florida--but Puerto Rico was never extended a lifeline. Eventually, the debt skyrocketed to $70 billion USD and Puerto Rico's economy began to grind to a halt as creditors called in payments.
Two other wholly unique laws then kicked in that further crippled the economy. First, Puerto Rico was required to pay off the debts before funding basic government services. Second, the island was barred from finding relief through bankruptcy--an option that is available to all 50 US' states.
For the record, Puerto Rico is NOT asking for a bailout, as John Oliver notes. Instead, it's asking for debt relief, something that doesn't involve taxpayers. The only affected parties would be creditors that knew the island's bonds were supremely risky at the time of purchase.
The rationale here is simple. If Puerto Rico is forced to pay the debt back at current rates, then essential government services such as paying salaries, funding hospitals, etc., will be eliminated. The economy will then contract even more as people are pushed into poverty and tax revenues dry up. This cycle will continue indefinitely until Puerto Rico's economy is incapacitated and the country's middle and upper classes flee to mainland US.
If this path is pursued, Puerto Rico has no chance of paying back the debt unless it begins to sell off public assets such as land and water rights, parks, etc. Basically, creditors are pushing to slice and dice the island.
The other path involves restructuring Puerto Rico's debt so that it can maintain important government services and revive its flailing economy. Debt will still be paid back, in feasible amounts on a feasible timeline.
It's often overlooked that Puerto Rico is a US territory and Puerto Ricans are US citizens.
As John Oliver emphasizes, "We have to start treating it like an island of American citizens whose fate is interwoven with ours."
Legislators have the power to fix this situation and rescue fellow US citizens. If morality and a sense of unity are not enough to compel lawmakers to action, then mega-star Lin-Manuel Miranda is prepared to get them some tickets to his Pulitizer-prize winning play Hamilton. A play that could definitely teach legislators a thing or two about national finances.