Both Greece and Puerto Rico are in financial trouble. Each is too deeply in debt.
American taxpayers may pay some of the cost of solving each problem. The U.S. contributes to the International Monetary Fund, where Greece has defaulted on a big loan payment. And Congress may have to find a way to bail out Puerto Rico.
Though the two situations are different, they have something else in common. Both are the result of weak and confused underpinnings.
How did Greece get into trouble? It lived beyond its means, and financed excessive public spending by loans. Lenders relied partly on what turned out to be inaccurate information provided by the Greek government about the amount of its debt.
The 18 other European countries using the same currency as Greece – the euro – want it to raise taxes and carry out tough cutbacks on pensions and other public spending before they lend it even more money to make some of its huge upcoming debt payments.
The Europeans resist Greece’s requests, because the euro is backed only by the actions of its 19 user countries to behave themselves financially. And few trust Greece to keep its word to carry out reforms now that it really feels the pinch.
Puerto Rico also wants to cut its debt. It would like to reduce its lenders claims by filing for bankruptcy. It is a U.S. territory with federal law preventing it from using bankruptcy. It wants that law changed. States can seek bankruptcy protection, but they don’t because of their own laws preventing too much debt.
How did Puerto Rico get into so much trouble? U.S. law encouraged it to borrow big, by offering it lower interest payments. This was done by making its borrowing tax exempt federally and in all states. By contrast, bonds issued by a state like Maine are federally tax exempt, but only state tax exempt in the issuing state. So Maine gets less encouragement than Puerto Rico.
Puerto Rico, a U.S. territory, sometimes acts as if it were an independent country and sometimes like a state. Its residents do not pay American taxes but do receive federal benefits. This unusual status helps explain how it had the ability to get itself into excessive debt.
The twin crises are real and deep, and they call for measures more than simply patching them over.
Europe needs to decide if it will accept more unity to back the euro and make it a true currency. The U.S. is faced with deciding if Puerto Rico should be put on the road to statehood or treated like an independent country that chooses to use the dollar as its currency.