Puerto Rico's Odious Debt

Firing teachers, closing over 150 schools, increasing taxes, laying off public sector workers, proposing to reduce the minimum wage, waiting in emergency rooms due to a lack of nurses, forcing migration to the United States, increasing unemployment and underemployment, separating families and food insecurity. This is Puerto Rico's new normal under the weight of the crushing $72 billion debt owed primarily to hedge funds and private investors. Much has been said and analyzed about the bleak economic viability of the island's future that the crisis has provoked.

The truth is Puerto Rico owes more than its Gross National Product (GNP), with no immediate relief in sight.

The human impact is both visible (professionals and students leaving the island to seek employment in the United States) and invisible (the elderly and ill laying in cots in hospital hallways for days at a time, waiting for a room to become free). Blame runs unbridled -- hedge funds engaged in risky, and perhaps negligent, financial ventures; the government mismanaged funds and intentionally avoided disclosing its financial capacity to repay its debt; antiquated federal maritime laws that place a multi-million dollar burden on the government of Puerto Rico to use flagged U.S. ships to import it's food (of which 85% is imported from the United States).

Equally prevalent are solutions that have been put forward to handle the crisis, in the face of what is yet another looming deadline where the government is not expected to be able to meet its repayment obligation on December 1, 2015. Coalitions have been formed to lobby and advocate for modifications to the bankruptcy code in order to allow for Puerto Rico to declare Chapter 9 bankruptcy, which would permit the island to restructure its debt. Calls have been made directly to hedge funds to reduce the debt, as well as to the Treasury Department to pressure reluctant creditors to engage in debt renegotiations.

Additional proposals that primarily involve federal action include modifying the Jones Act, the 1920 law that includes the Cabotage Law, which is applied in its entirety to Puerto Rico (and only Puerto Rico), resulting in extremely high shipping costs to the island; elimination of disparities in healthcare funding and reimbursements to the island under Medicaid and Medicare; and extending federal tax credits to working families and parents to Puerto Rico. Investors and those in the financial industry have simply advocated for increased austerity measures, like the ones already adopted that are crippling the island.

None of the options listed would necessarily relieve the unbearable economic and social burden on the people of Puerto Rico. What would relieve it, however, is if the government was not required to repay decades of accumulated debt and instead could focus on addressing its underlying economic crisis. In order to do that, the debt must not only be declared unpayable, as the Governor of Puerto Rico, Alejandro Garcia Padilla, did on June 28, 2015, but immoral and perhaps illegal as well. 

Puerto Rico's debt is indeed immoral and the government could mount a defense that they should not be required to repay it, at least in part, under the concept of odious debt, a legal theory that holds that the debt incurred by a regime or sovereign for purposes that do not serve the best interests of the people of that nation should not be enforceable under legal principles of equity. Odious debt recognizes that debt that was acquired to serve unjust, fraudulent or corrupt ends is illegitimate, and that under principles of equity and fairness, it must not be repaid.

In order to prevent a continuous injustice upon the people of that nation who sacrificed in exorbitantly-priced goods and diminished public services while their nation was being indebted, governments who inherit such debt are not required to spend funds out of their public treasury in order to pay it back.

Although the notion of odious debt originates from the realm of transitional justice, where a new regime inherits the debt acquired by the previous (likely corrupt or abusive) regime, its application is still relevant in the context of Puerto Rico, a colony of the United States. Odious debt includes war debts, subjugated or imposed debts, and regime debts. The United Nations Special Rapporteur of the International Law Commission described odious debt as "any debt contracted for purposes that are not in conformity with contemporary international law and, in particular, the principles of international law embodied in the Charter of the United Nations," which requires, among other things, that governments respect and protect economic and social rights.

Interestingly, the origins of odious debt first appeared in practice when the United States refused to assume the debts acquired by Spain when they were ceded sovereignty over Cuba, Puerto Rico, the Philippines and other territories in the late nineteenth century, and decried that the debt incurred by Spain was not contracted for the benefit of the Cuban people and in fact was hostile to their interests. Austerity measures, like the ones already implemented and being proposed in Puerto Rico, are not only disastrous for the people of Puerto Rico but they seriously undermine and even violate the economic and social rights contemplated by the Charter and enshrined in international human rights law.

The principles of odious debt provide a moral and legal foundation for severing, in whole or in part, the continuity of legal obligations where the debt in question was contracted and used in ways that were not beneficial, or were actually harmful, to the interests of the population. Thus the debt is either adjusted or severed (often in the context of political transitions) based in part on the notion that the debt incurred did not benefit, or was even used to repress, the people.

In fact, the benefits incurred, if any, by the citizenry of a nation is a primary consideration of whether debt relief should be granted. In the case of Puerto Rico, the debt has been accumulating over the last couple of decades, while Puerto Rico has been in a recession for at least the past ten years and public services have been cut steadily for the past six years. Talk of continuing to cut public services happens daily, as does the threat of a government shutdown if the island is forced to hand over each payment in full every time one becomes due. Meanwhile local businesses are suffering the brutal impact of lost revenue, talent and clientele.

Whether a debt is considered odious, and thus should be forgiven, also takes into account whether or not the creditor knew or should have known of any risky circumstances at the time the debt was contracted. Many creditors--particularly hedge funds known as "vulture funds" who buy distressed debt at extraordinary high rates--knowingly engaged in precarious financial investments in Puerto Rico, even during the economic recession and after Puerto Rico's credit rating was downgraded.

In fact, they charged higher interest rates because of that risk and to protect them from a default. What is now being labeled as a public debt, forcing the government and ultimately the people of Puerto Rico to pay for it, was created by private entities who engaged in risky financial investments, knowing the disastrous impact it could have on those same people who are now being asked to pay highly for the creditors' perilous behavior.

The colonial status of Puerto Rico both directly contributes to the economic crisis as well as inhibits comprehensive solutions that would address short-term concerns and long-term economic policy changes. The United Nations Special Committee on Decolonization issued its annual resolution on the colonial status of Puerto Rico earlier this year, noting that the island needs to be able to make decisions in a sovereign manner, to address their urgent economic and social needs, including its 12 per cent unemployment rate, marginalization and wide-spread poverty of its residents.

The Committee's position recognizes that the economic vulnerability of Puerto Rico is a direct consequence of its colonial status, and that Puerto Rico's lack of political power to affect decision-making in the United States is reflected in the policies and politics that shape and ultimately cripple the island's economy.

The colonial relationship of Puerto Rico to the United States is relevant, albeit unique, in the context of odious debt because Puerto Rico's political status is a critical impediment to its ability to negotiate, or renegotiate, the debt, seek foreign investment or financing from international banking institutions or to implement economic policies that would allow it to restructure the debt in the short-term and build a viable economy for the future. Essentially, Puerto Rico's debt is made more odious because of the lack of viable and dignified options for remedying it. Puerto Rico's constitution contains an unusual clause that requires that the island pay back general-obligation bonds before virtually any other government expenditure (the constitution was drafted with the help of the United States), perversely prioritizing private creditors at the expense of public needs.

The commonwealth must follow orders from the U.S. judiciary, the jurisdiction where vulture funds would, and have, appealed to recoup their money. Talk of a federal bailout elicits laughter in Washington. And unlike Detroit or other municipalities and counties, Puerto Rico is not eligible for Chapter 9 bankruptcy protection.

When the Puerto Rican government tried earlier this year to pass what is known as the quiebra criolla, the Puerto Rican version of debt restructuring for its public companies (which would have been allowed under federal bankruptcy protections), a multi-billion dollar hedge fund that holds large amounts of the island's debt sued to declare the law unconstitutional. A federal appeals court in fact held the law unconstitutional, noting that Puerto Rico cannot behave like a state in seeking bankruptcy protections that don't apply to it, and thus circumvent United States imposed law.

If there are little to no available domestic remedies, there are fewer international ones. Because of its colonial status, Puerto Rico cannot access international financial institutions such as the Development Bank, Banco del Sur of MERCOSUR, or even the International Monetary Fund (IMP), institutions that may offer more lending favorable rates and terms to Puerto Rico. The lack of sovereignty means that Puerto Rico cannot enter into treaties or commercial agreements with other countries, such as Petrocaribe for example, which would allow the island to purchase fuel at a preferential price and under favorable terms. Puerto Rico has no control over its borders, customs, aerial space or communications infrastructure -- all areas that could bring a much needed boost and advancements to the local economy. Ultimately, resolution of Puerto Rico's economic and debt crisis will require a political solution in addition to an economic one.

Aside from the more obvious economic consequences of the crisis on the people of Puerto Rico, the odious nature of the debt has also resulted in widespread human rights violations, including the erosion of economic and social rights. Austerity measures, both the ones implemented and the ones advocated for, amount to economic violence and have resulted in the forced migration of hundreds of thousands of people, cuts to critical public services serving marginalized and vulnerable communities, reduced employment and threats to remove federal labor protections. Forced repayment of the debt will only result in increased privatization of public services, tax breaks for the very few and very wealthy and enhanced tax burdens on poor people, creating more wealth disparity and inequality in an already very unequal society.

For those who continue to doubt the odious nature of the debt, and thus rebuke efforts to question the island's responsibility to repay it, many have called for an auditing of the debt. A citizen's audit would detail the nature of the debt; how it was accumulated, by whom and under what terms; how the funds received by the government were spent; a thorough risk assessment and what investors knew regarding the risk at the time; and what benefit was ultimately granted upon the people as an unpayable debt was being acquired in their name. As long as the people of Puerto Rico are being told that the debt is now public, they should be made aware of what they are obliged to pay for.

Odious debt is ultimately an equitable remedy, not a remedy at law. It is intended to prevent further injustices and abuses upon the people of a nation who have suffered at the hands of unscrupulous officials and creditors. Puerto Rico's debt is odious, both because of how it was accumulated and the price now being asked to pay it back. The people of Puerto Rico should not be required to pay the price of their own demise in order to enhance the profits of a few. Justice requires it.

Natasha Lycia Ora Bannan                                                                          

Puerto Rico's Odious Debt