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Puerto Ricans Face an Uncertain Future After Debt Default

Puerto Rico, which defaulted on its debt for the first time, owes $72 billion to creditors; many residents are emigrating to the States, others wary of the future
Photo by Justin Lane/EPA

A week after their government defaulted on its debt for the first time, Puerto Ricans say the growing effects of austerity and uncertainty over their futures are taking a heavy psychological toll.

Last Monday, Puerto Rico's development bank paid only a token amount toward some $58 million due investors on its Public Finance Corporation bonds. Though the legislature-backed bonds are difficult to litigate in court, Puerto Rico's inability to pay made concrete the "debt spiral" that in late June Governor Alejandro Garcia Padilla said was unsustainable. Taken together, the island's government owes roughly $72 billion, and has an unfunded pension liability of approximately $35 billion.


"It's definitely an environment of anger and frustration," Valerie Fenosik, a fashion designer and part-time professor who lives just outside San Juan, told VICE News. "You wake up every day and you just feel angry. You definitely think, You know what, what if I just leave this place. It's getting really dark."

In part owing to her husband's job as a government attorney, Fenosik and her family enjoy greater financial security than most Puerto Ricans. But with a one-year-old child and another on the way, the healthcare they rely on now and her husband's pension — which they will rely on in the future — are vitally important.

In a refrain now common among nearly all Puerto Ricans, Fenosik cited the island's exorbitant electricity costs, which in some cases can run into the hundreds of dollars for a two-bedroom home. The island's electric authority, PREPA, owes $9 billion to creditors, including many hedge funds. Puerto Rico's own government owes some $250 million in unpaid bills to the company, whose oil-burning facilities have repeatedly been cited as inefficient.

If PREPA were located in an American state, it could avail itself of Chapter 9 bankruptcy. But because of Puerto Rico's unique status as a territory, its municipalities and public corporations cannot make use of such an orderly restructuring process, as Detroit, Michigan, and Stockton, California, have in recent years. Bills to extend Chapter 9 access to Puerto Rico — a step its leaders say is of utmost importance — have faced opposition in Congress. With so little known about how Puerto Rico's debt crisis will proceed, even families like Fenoski's are fearful for their future.


Puerto Ricans said the anxiety plays out every day, in the streets, in cars, and at home. People stay glued to AM talk radio, where pundits prognosticate about the island's future.

"They are talking all day about what could happen, but we don't know," Luis Gallardo, a municipal legislator in the city of Aguas Buenas, told VICE News. "There's an overall sense of uncertainty, and that can make people pretty morbid," he said, turning down the dial in his car.

"It's on the front page every day, it's been months since I've seen anything else," added Gallardo. "You'll hear old ladies on the street talking about hedge funds and bond markets, something you never heard two or three years ago."

Related: Why Are So Many Young Puerto Ricans Leaving Home? 

Experts say those on the island have reason to be worried about hedge funds. Though its debt was for many years attractive to mutual funds and conservative institutional investors, so called "vulture funds," which seek out distressed assets in places like Greece and Argentina, have recently taken on an outsize role in Puerto Rico, buying stakes from their original holders at steep discounts.

"While several mutual funds continue to have significant exposure to Puerto Rico … hedge funds and other distressed players have increasingly been involved," Marc Bushallow, managing director of fixed income at the asset management firm Manning & Napier, told VICE News. Though the opacity of bond markets make it difficult to obtain exact figures for their holdings in Puerto Rico, the ratings agency Fitch estimated that in 2013, hedge fund-owned bonds worth roughly $16 billion accounted for 24 percent of what was then a total debt of $65 billion. Others have put the total even higher.


Bushallow said last week's missed payment was strategic and intended "to serve notice to [Puerto Rico's] creditors to bring them to the table." A default on the island's general obligation bonds, which under Puerto Rico's constitution must be paid before even public workers are, would be much more alarming, he added. This Monday, Garcia Padilla's chief of staff said the territory expected to meet an upcoming January payment on those bonds, but only by borrowing hundreds of millions from other government accounts. In July, PREPA borrowed heavily from bond insurers to make a $415 payment.

"Every day there's something else, it's like they are trying to stitch pants, and not dealing with the problem that lasts back decades," Pierro Vazquez, a 31-year-old recent law school graduate, told VICE News. "Every day in my neighborhood I see more empty houses; I see more people joining the military, doctors, engineers. There is no industry, and the emigration has been huge."

Last month, Puerto Rican officials met in New York with investors in an attempt to open dialogue and ultimately, the government hopes, restructure its debt, by lowering interest rates and stringing payments out over many years. There is little indication that bondholders, particularly hedge funds, are keen to change the terms of their investments. The government itself is awaiting a report due August 30 from the task force created by Garcia Padilla before making its next big steps, whatever they may be.


In the meantime, the island's dwindling population is left in limbo. Gallardo said towns and cities are particularly vulnerable because of how centralized the island's political and economic systems are. In order to borrow, municipalities like Aguas Buenas have to lump their requests in with others on the island, and route them through the government in San Juan, which then sells bonds on the open market.

"But we can't do that now. Even if on the city level we have a repayment capacity, we suffer because the state doesn't have credit," said Gallardo.

Gallardo, who supplements his public wages by teaching classes in public finance, says local governments have had to cut back on working hours and forestall much needed infrastructure projects. Economists say such cutbacks only worsen the situation in Puerto Rico, further shrinking an economy that has struggled to keep pace with the massive outmigration of the past decade. Gallardo is experiencing the withering effects firsthand: With fewer students enrolling at the school where he teaches, his hours have been cut.

For Puerto Ricans in the American states, seeing any sort of solution to the island's vexing finances can be equally frustrating.

"It's a little murky as to what exactly is happening," Edwin Melendez, director of the Center for Puerto Rican Studies at the City University of New York's Hunter College, told VICE News. "The bind that the government is in is, the minute they start talking about default or missed payments, the credit market shrinks. So the liquidity pressure for the government is going to be even worse."


"There is a growing number of poor people with access only to food stamps and the underground economy to survive," added Melendez. "For those people the situation has really worsened."

When VICE News visited the island in February, existing austerity measures had already led to cuts in programs vital to Puerto Rico's must vulnerable communities. In an effort to reduce deficits — and in no small part to show good faith to investors — Garcia Padilla has continued with plans to raise taxes and retrench parts of the public workforce. But in his June announcement, the governor made clear the island can only support such measures up to a point. When a recent hedge fund-financed report called on the government to double down on measures that include the firing of more teachers — something the government has already broached — top officials responded with exasperation.

Among the organizations that has had to fight for funding is PITIRRE, a drug treatment program headquartered on the outskirts of San Juan. Miguel Vazquez, the psychologist who runs PITIRRE, told VICE News that the program, along with similar groups, was initially told their entire tranche of government financing would be cut for the fiscal year beginning July 1. PITIRRE, which originally requested an annual budget of $10 million, made due last year with just $1.6 million. After a number of non-profits in similar straights lobbied the territory's legislature, the worst of the cuts were put off; this year, the program will receive roughly $1.44 million.


After treating 826 drug users last year, Vazquez says the program envisions only being able to attend to 567 people until next July. Already, it has had to lay off several staff members and reduce working hours for others, in addition to similar moves made last year. After next July, PITIRRE has no idea if there will be any cash for the program, which patients described to VICE News as vital.

"These last two months have been horrible," said Vazquez. "We economized to prevent closing down. We had to cut two hours of service each week to save money and keep open. All the administration took pay cuts of 10 percent."

"In the end, we will do more for less, that's what we've done every year," he added.

While harm reduction measures like the ones PITIRRE offer face the pinch of Puerto Rico's fiscal crisis, police enforcement of suspected drug pushers has been relentless in recent months. In July, the Department of Justice announced its largest ever RICO indictment on the island, levying charges against 105 residents it said were part of a gang that sold heroin, crack, and cocaine out of public housing projects. In March, 61 people were indicted for narcotics violations and money laundering; in May, 24 were hit with trafficking charges.

Vazquez said stepped-up interdiction measures has coincided with a decrease in drug purity, leaving addicts scrambling, sometimes by violent means, to obtain their chemical of choice. The price of opioid replacement therapies like Suboxone, which PITIRRE offers to heroin addicts, have risen on the street. Making matter worse, Puerto Ricans who would sometimes offer a dollar or two to homeless users have tightened their purse-strings, faced with their own domestic shortfalls.


"If they are not getting the money while begging, they are going to try to steal or commit crimes because addiction is a necessity for them," said Vazquez.

Fenosik, the fashion designer, said she was waiting for the next gubernatorial election, in 2016, before deciding whether to try to expand her business. "There have been some positive changes in the creative areas, strangely, there is a bit of hope there," she said cautiously. In San Juan's Santurce neighborhood artists have established residences, created sculpture studios and art spaces, and left few walls unpainted. Some of the more successful have been able to sell their work on international markets.

But for other Puerto Ricans — everyone from engineers to lawyers to blue collar workers — reaching outside economies means moving, almost always to US states.

"You have 40,000 to 50,000 people leaving every year," said Melendez. Most head to states like Florida or Texas. Melendez estimates that when data is compiled for Puerto Rican migration for 2014, it will show as many in the Sunshine State as in New York.

"It's unprecedented, even compared to the migrations of the 1950s that brought Puerto Ricans to New York," he said.

Melendez and other demographic experts say there could be a silver lining for Puerto Rico in the recent outmigration. As a pivotal voting bloc in the most capricious of swing states, Floridian Boricuas could in effect decide the next presidential election, something several candidates, including Jeb Bush, Hillary Clinton, and Martin O'Malley, have noted. O'Malley in particular has pushed for Chapter 9 access for the island.

But Puerto Ricans are skeptical about their chances. Historically, American presidents have paid little attention to the territory. Behind the capital in San Juan, a series of statues depicts American leaders who "were so moved as to visit the island and its people;" the last is of President Obama, who made a short trip there in 2011. Puerto Ricans, who cannot vote for president, greeted Obama. Obama spent four hours on the island, much of it at a fundraiser. He hasn't been back since.

Residents are equally cynical about the 2016 election. Among the candidates lining up to face Garcia Padilla are Pedro Pierluisi, the island's nonvoting member of Congress, and Ricardo Rossello, the son of former governor Pedro Rossello, whose administration was accused of breathtaking corruption. Pierluisi and Rossello are members of the New Progressive Party, which supports statehood. Garcia Padilla, the leader of the Popular Democratic Party, has said statehood would turn Puerto Rico into a "Latin American ghetto," by causing it to lose certain tax breaks.

"The other main political part in Puerto Rico will win the elections," predicted Vazquez, the law student. "Not because they are the best one, but because everyone is mad at the one that is in charge now."

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