Puerto Rico’s Neocolonial Debt

3 December 2016 by Pierre Gottiniaux

In 1898 the United States declared war on Spain to ‘free’ Cuba from Spanish domination. Spain was defeated and signed the Treaty of Paris in December 1898, in which it sanctioned Cuba’s independence and ceded to the US several other overseas territories, including Puerto Rico (the others being the Philippines, that became independent in 1946, and Guam, an island in the Pacific that is still under US control, with a similar status to that of Puerto Rico).

In 1952 Puerto Rico gained partial autonomy but never became independent nor indeed a US state. Puerto Ricans are US nationals but can only exert the attendant rights if they migrate to the continent. They can vote to elect their governor but not to elect the US president. Their imports are entirely controlled by the United States under a 1920 colonial law, the Merchant Marine Act, which states that all goods imported for Puerto Rico must first be delivered on the continent then forwarded on US boats. Lastly, contrary to all other US local governments, whether cities or states, Puerto Rico cannot declare bankruptcy as did Detroit in 2013 to renegotiate its debt without the threat of creditors legal actions that would not fail to arrive should it default on repayments. In fact it is still a US colony and the recent history of this island oppressed by a staggering debt is evidence enough.


Puerto Rico is crushed by a debt of about $73 billion, which in relation to the number of inhabitants is ten times the US average figure. The origin of the debt is the colonial status of Puerto Rico and the US monitoring of this territory that was used as a tax haven Tax haven A territory characterized by the following five independent criteria:
(a) opacity (via bank secrecy or another mechanism such as trusts);
(b) low taxes, sometimes as low as zero for non-residents;
(c) easy regulations permitting the creation of front companies and no necessity for these companies to have a real activity on the territory;
(d) lack of cooperation with the inland revenue, customs and/or judicial departments of other countries;
(e) weak or non-existent financial regulation. Switzerland, the City of London and Luxembourg receive the majority of the capital placed in tax havens. Others exist, of course, such as the Cayman Islands, the Channel Islands, Hong Kong and other exotic locations.
for North American investors and companies thanks to a number of tax incentives, among which the notorious threefold tax exemption on Puerto Rican debt securities. [1] The 2008 crisis, the slackening of tourism and the austerity measures taken over the past 15 years are additional elements in the dark picture of the island’s current situation.

The consequences are quite simply disastrous for the population, subjected to a genuine humanitarian crisis as poverty and inequalities get worse. Hundred of schools are closed, hospitals too have to shut down for lack of financial means and staff, emigration to the continental US reaches unprecedented figures (from some ten thousand people a year before 2010 to an average of 48,000 a year between 2010 and 2014), and social security is being dismantled: lower wages, higher contributions, lower rates of health service compensation… Nowadays in Puerto Rico more than half of the children live under the official poverty threshold.

These various elements are evidence enough that Puerto Rico’s debt is odious, because of the island’s colonial status, and is unsustainable considering the deleterious consequences it has on the population. The debt should thus be repudiated by a unilateral act of the Puerto Rican government, who should also take measures to ensure its population’s fundamental rights. Yet this requires a strong, progressive, and even radical political determination that is utterly foreign to the current Puerto Rican government. In the November 2016 national election, the inhabitants, who, as we know cannot vote for the US president, were called upon to elect a new governor, a right-wing representative has come to power with a program to clean up the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheets through austerity policies and to achieve statehood within the US union, become the 51st star on the flag – a proposal in which Trump seemed to be interested during his campaign, but that can hardly be implemented because of the huge debt and because of deep differences in terms of incomes and social protection.


The social movements have seized upon the question of the debt. They are calling for an audit that will clearly identify its origins and eventually its odious, illegal, illegitimate or unsustainable nature in order to proceed towards total, or partial, cancellation based on established principals in international and domestic law.

A commission has been set by VAMOS4PR that gathers together civil society organisations, unions, locally elected representatives and ordinary citizens. A preliminary report has already highlighted legal discrepancies in Puerto Rico’s debt. Unfortunately, through lack of means, the Commission has not been able to meet for several months and its work is currently suspended. We can nevertheless retain the primary indications suggesting that a large part of Puerto Rico’s debt is illegal, having been subscribed in contradiction to the island’s constitution. In fact, the constitution imposes that a balanced budget be maintained and prohibits borrowing to cover deficits, allocating more than 13% of the Colony’s revenues to the repayment of debt interests and bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. issues of a maturity exceeding thirty years. Nevertheless, Puerto Rico has borrowed up to $30 billion to cover deficits since 1979, current payments represent between 14 and 25% of revenues and the Puerto Rico government practices ’rollover’, as do many of the World’s governments. ’Rollover’ is borrowing to repay previous outstanding capital that has come to maturity. The Commission cites bonds issued to cover capital repayments of debts issued in 2003 that were also issued in order to refinance borrowing that originated in 1987.
These are serious leads for investigation and should be followed up. They are not isolated, other important enquiries are being made into Puerto Rico’s debt situation which points fingers at, among others, the role played by the private banks.


It is interesting to see the level of creativity the banks employ in the art of getting rich at others expense. Puerto Rico was given no quarter. Although the Constitution imposes strict conditions on public debt management, the State and the publicly owned enterprises have, with the help of the banks, achieved an absolutely extraordinary level of debt particularly through mechanisms that capitalise interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. :

- CABs (Capital Appreciation Bonds): these are bonds whereby the issuer promises reimbursement of the capital borrowed and the whole of the interest at the maturity of the bond. In between time the unpaid interest is capitalised having the effect of increasing the sum of the interest paid over each succeeding, usually annual, period. In the case of Puerto Rico this system has produced very lucrative operations for investors. According to one study, [2] of the $37.8 billion of Puerto Rican CAB debt the initial issue was valued at $4.3 billion. The interest being the rest of the $37,8 billion, that is $33,5 billion profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. for the banks, the equivalent of 785% interest! [3]

- Debt refinancing Debt refinancing Taking out new loans to reimburse current debts. : although prohibited by its constitution Puerto Rico seems to be passed master in the subtle art of rolling over debt, a practice that has reached enormous proportions. Total public and State debt is to the tune of $134 billion, of which , close to half, $51,5 billion was taken on to cover repayments of previous debts. These rollovers did not produce better interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, nor were they to cover capital loans that had come to maturity and could not be honoured in full and final fashion. The increase in refinancing was largely in the interest of banks and investors in Puerto Rican public debt, for which US investors benefit from a triple tax exemption (local, state and federal), and ironically, higher and higher interest rates as the situation deteriorates. So, the banks pushed Puerto Rico to rollover its debt at a rapid rate, to make as many issues as possible, that the investors were quick to grab. Except that when an old debt is refinanced the unpaid interest becomes capitalised into the new loan. The interest is thus calculated on a higher sum. Another way of compounding interest.

Compounding interest is a double problem for a borrower: it considerably increases the servicing of the debt as at the same time it is supposed to transform the investors profit (the interest) into new debt added to the initial debt. This is particularly significant in the case of the CABs (see above). Other than the fact that an audit of Puerto Rican public debt would identify which part, if not all, of Puerto Rican debt is odious, illegal, illegitimate or unsustainable and the conclusions would uncover the banking and financial methods, that affect the day to day lives of the people. It is important that these practices, that have no other interest than the profits of a privilege minority be revealed, publicised, understood and finally rendered ineffective. Certain questions such as: who authorised Puerto Rico’s CAB operations; in whose interest; how is it that a small minority of people have managed to flout so many, may also be asked.


The US federal government wants to meet the debt crisis in Puerto Rico without meeting the collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. humanitarian crisis: it set up a home-made IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

in the guise of a Fiscal Control Board, nicknamed The Junta by the inhabitants of Puerto Rico. The board was established by the PROMESA act, voted in July 2016; it consists of seven members, four of which are appointed by the Republican group in the House of Representatives and three by the Democrats. The governor of Puerto Rico is a member, but without any right to vote or participate in final decisions. The Board’s task is to restore the Puerto Rican government’s ‘fiscal responsibility’ and give the island access to financial markets to finance its investments. But it is not at all supposed to ‘bail out’ Puerto Rico as was done for private banks. The money that is wanting is to be found in Puerto Rico, through a delicate mix of cuts in public spending, layoffs and privatizations (for those who are not yet familiar with the recipe, it can also be found in all Structural Adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
Programs, Poverty Reduction Strategy Program, HIPC Heavily Indebted Poor Countries
In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.

The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.

Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.

List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia.
Initiative, Greek memoranda and other similar fun games that have been implemented on a large scale for the past thirty years without ever resulting in anything but more profits for some vultures).

Apart from its program, which will not alleviate the island’s economic plight and will further deteriorate the already tragic predicament of its population, the board raises issues at several levels:

  1. it is enforced by the US federal government which the Puerto Ricans cannot elect;
  2. it can implement neoliberal reforms that have shown how efficient they are when it comes to producing extreme poverty, inequalities and economic dependence, and this without having to consult the Puerto Rican Parliament;
  3. it consists of members whose concerns are light-years away from the Puerto Rican people’s daily lives, with its few Puerto Rican members bearing a heavy responsibility for the island’s current economic predicament;
  4. conflicts of interest mar its record even before its very first meeting (see box).

In short, setting up a Fiscal Control Board comforts the US colonial hold on Puerto Rico and claims legitimacy by describing the former Puerto Rican governments as irresponsible and needing the supervision of the fiscal control board.


The Fiscal Control Board consists of seven members and the governor of Puerto Rico, though the latter will not be able to vote on any recommendations or final decisions. Four out of the seven board members were selected by Republican Congress members and three by Democrats. Five of them are connected with financial institutions in the private as in the public sector.

Jose B. Carrión III: president and principal Partner of an insurance company. He was appointed chair of the board. His relatives have interesting positions: his father used to be director of the largest bank on Puerto Rico, Banco Popular (now a cousin of his has taken over). His sister works for a business bank and is a consultant on Wall Street. She is married to Puerto Rico’s representative at the Congress, Pedro Pierluisi, who is suspected of filing bills that would benefit his wife’s clients.

Andrew G. Biggs: a Republican who stood for privatization of social security and slashing retirement pensions when he was Bush Jr’s economic adviser. He gives the lie to the White House’s promise that the PROMESA Act will protect old age pensions.

Carlos M. Garcia: former CEO of the Santander bank, currently CEO of the island’s Government Development Bank, he took part in setting up the system for capitalizing interests described above, for the greater benefit of his former employer. He is also architect of the controversial Ley 7, which allowed the government to temporarily declare a fiscal emergency and lay off thousands of public sector employees in response to Puerto Rico’s fiscal crisis. [4] Note that the Financial Industry Regulatory Authority (FINRA) sentenced Santander to a $6.4 million fine for fraudulently reselling Puerto Rican debt securities to private individuals without informing them of the risk involved.

José R. González: also a former CEO of the Santander bank in Puerto Rico, with Carlos M. Garcia. He has also worked for several banks such as Crédit Suisse in Boston.

Arthur J. Gonzalez: worked for a long time at the IRS before becoming a private lawyer for big companies and then served as a judge on the United States Bankruptcy Court for the Southern District of New York from 1995 to 2012, retiring as Chief Judge. He had the ‘distinction’ of assessing three of the major bankruptcies of the last decade (Enron, WorldCom and Chrysler – he missed Lehman Brothers).

Ana J. Matosantos: the only woman on the board, president of Matosantos Consulting, former director of the California Department of Finance and deputy director of budgets for the state.

David A. Skeel Jr.: professor of bankruptcy law.

All are closely connected to the private sector, when not directly with some of the creditors, even in Puerto Rico. It seems obvious they will wish to defend the interests of the creditors and not of the people. With such a team Puerto Rico’s creditors may rest easy.

As a footnote, one of Rob Bishop’s advisers, the Republican who proposed the PROMESA bill, is called Bill Cooper. He drafted the part of the bill about the island’s transition to natural gas and was suggested as chair for the oversight board. Eventually he had to desist because of a flagrant conflict of interest. [5] Bill Cooper had forgotten to mention that he had been president of the Centre for Liquefied Natural Gas, a trade association of producers and shippers of natural gas.

Unfortunately, it is almost a textbook case that is unfolding before us, with all the well known components of people’s enforced submission: colonialism and neocolonialism; the interests of a privileged minority are widely put forward; laws are flouted; the people’s human and democratic rights are dismissed. Puerto Rico’s debt must be cancelled, but it is unlikely to happen. An integral debt audit, with active citizens’ participation, would make it possible to expose Puerto Rico’s debt as illegitimate and to mobilize public opinion, provided social movements use the findings and keep demanding the cancellation of the debt and a genuine change of policies.

Translated by Christine Pagnoule and Mike Krolikowski


[2ReFund America Project, Puerto Rico’s Payday Loans, 30 June 2016, https://fr.scribd.com/doc/317074793/Puerto-Rico-s-Payday-Loans#from_embed

[3This unpalatable practice of compounding interests is forbidden or strictly framed in several countries such as Italy, Switzerland or Ecuador (since it adopted a new constitution in 2008). It is clear, however, that anatocism (compounding interests) is tolerated in other countries because creditors managed to legalize their usurious behaviour. This is why is is forbidden in the 2008 Ecuadorian constitution. It should be included in all constitutions.

Other articles in English by Pierre Gottiniaux (14)

0 | 10



8 rue Jonfosse
4000 - Liège- Belgique

00324 60 97 96 80