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Puerto Rico’s Neocolonial Debt
by Pierre Gottiniaux
3 December 2016

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 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 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 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:

- 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 for the banks, the equivalent of 785% interest! [3]

- Debt refinancing: 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, 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 humanitarian crisis: it set up a home-made IMF 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 Programs, Poverty Reduction Strategy Program, HIPC 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

Footnotes :

[2ReFund America Project, Puerto Rico’s Payday Loans, 30 June 2016,

[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.

Pierre Gottiniaux

CADTM Belgium