The Greece of the Caribbean

NEW YORK – There was a time when it might have been said that Puerto Rico, in the midst of a wrenching debt crisis, was returning to its Latin roots. After all, Latin American governments were once world leaders in over-indebtedness. But the United States’ public debt now stands at over 100% of its GDP, and Detroit has just gone through bankruptcy. Perhaps Puerto Rico is, at last, becoming more American.

Or perhaps it is becoming more European, given the resemblance of its debt problems to those of Greece. After the adoption of the euro, Greece was able to borrow at interest rates not much higher than those paid by northern European countries, even though its fiscal policy was worlds apart from that of Germany or Finland. The result was massive debt accumulation to fund current expenditure, not investment.

Puerto Rico – a US territory – was also allowed to borrow too much for too long. Its government bonds are tax-exempt everywhere in the US, and hence particularly attractive to US investors, who, despite the increasingly perilous state of the island’s finances, have gorged on them. So, Bloomberg reports, Puerto Rico has more debt – over $70 billion – than any US state government except California and New York, while its economy is smaller than that of Kansas.

Another similarity has to do with relative prices. Once it gave up the drachma, Greece was no longer able to devalue in order to cut the value of domestic wages in terms of foreign currency, and thus spur exports. With competitiveness lagging, the trade deficit soared, and so did unemployment.