By NEOnline from New Europe

Tuesday was a moment of truth for Puerto Rico, as the island’s creditors were unsure whether a $355 million payment would be met or whether the island would default in order to force debt restructuring.

The island made the specific payment as $273 million of the amount due had constitutional guarantees; however, Puerto Rico defaulted in August to a $58 million payment. The

Puerto Rico has been dubbed “America’s Greece.” As Europe was bracing in agony for a possible Grexit in July 2015, Wolfgang Schaeuble, Germany’s Finance Minister, turned financial attention towards Puerto Rico. At the time (July 8th), during an international event in Frankfurt, Mr. Schaeuble said, “I offered my friend [US Treasury Secretary] Jack Lew these days that we could take Puerto Rico into the euro zone if the U.S. were willing to take Greece into the dollar union. He thought that was a joke.“

Soon after these statements, in August, the island failed to make a bond payment, triggering default. And the economy of the island dominated by the greenback, which makes devaluation impossible.

Moody’s credit rating agency estimates that Puerto Rico is likely to default on more debt.

The island’s total debt load is $72 billion debt. Meeting payments for US Development Bank-issued debt is crucial for the island’s liquidity, but with 45% of its 3,5 million population under the poverty line and mass migration, Puerto Rico’s tax base is eroding. The most educated of the island are the first to immigrate to the United States.

The government’s cash flow interruptions call for extreme measures, including slashing wages and overhauling whole parts of the public sector.

Markets are now holding their breath for a $945 million payment due on January 1st, covered by similar legal guarantees. Governor Padilla has admitted that the island has “begun to default” in its struggle to meet US commonwealth bonds. The government is negotiating a debt-exchange swap, which is in effect a haircut.

There are still some differences from Greece.

First, the island’s debt is owed to middle class Americans, not states. In sum, it looks more like the debt Greece had in 2010. In addition, most of Puerto Rico’s debt is “non-federally guaranteed,” because it is owed by state owned utilities.

Secondly, bankruptcy is Puerto Ricco is not a bad word. The Governor of Puerto Rico has for some time been seeking from Congress the right to declare bankruptcy. One of the problems of the island is that it is no longer a cheap manufacturing destination, as it cannot compete with with Mexico, Haiti, or even Cuba. The expiration of a low tax programme in 2006 sacked out the island’s competitiveness.

Thirdly, the US government is offering no bailout. That means that creditors must come to terms with the island. As this is an election year, it is interesting to note that both the Republican Rubio and Mrs Clinton appeal to the Puerto Rican vote in the US and are calling for the island to be allowed to default.

There is another major difference. Certain parts of the island’s budget are ring-fenced, because of the island’s fiscal union with the United States. Receipts from Washington — Social Security, Medicare, Medicaid, and more — actually rose over the last few years.

For more on this story go to: http://neurope.eu/article/greek-drama-in-the-caribbean-puerto-rico-narrowly-avoids-default/