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Greece and Puerto Rico in 5 Stats

Ian Bremmer, Ph.D

(LinkedIn Pulse) – Puerto Rico and Greece are very different economies with a common problem: They exist within larger monetary systems that reduce the options available to manage their respective crises. Here are 5 stats that explain the similar paths these economies have followed, and why they will ultimately diverge.

Where it All Went Wrong

Use of the dollar gives Puerto Rico certain advantages. The bonds that Puerto Rico sells are exempt from local, state and federal taxes, making them particularly appealing to investors. Even when Puerto Rico’s economy started sliding in 2006, this exemption allowed it to continue borrowing cheaply. Unfortunately, the $72 billion it now owes, the equivalent of 70 percent of its GDP, exceeds the debt of every US state except California and New York.

Greece got access to cheap debt by dumping the drachma to join the euro. Markets figured that the EU banking system would backstop any financial problems, and 10-year bond spreads converged at about 4 percent. Greece continued borrowing to fund its extensive welfare system… until the global financial crisis hit. Greece’s fellow EU countries, the European Central Bank and the IMF stepped in to keep Greece afloat. These loans came with a cost. Today Greece owes its many creditors roughly 330 billion euros. That’s about 180 percent of its GDP. Its bonds now offer yields of around 14 percent.

Blind-sided?

Puerto Rico’s crisis did not come out of the blue. The island entered recession in 2006. Its debt is four times that of Detroit, which filed for bankruptcy in July 2013. Unlike Detroit, Puerto Rico can’t legally file for bankruptcy.

In Greece, officials were cooking the books to hide problems for years—with help at times from Goldman Sachs. Only in November 2009 did Greece reveal its true budget deficit would be 12.7 percent, more than double the previously published figure. It was this revelation that forced Greece into its first negotiations with creditors.

The Human Costs of Crisis

Greek unemployment is currently at 26 percent. More than half of Greek young people are unemployed. Since the crisis began, public sector wages have fallen 33 percent, and pensions are down 44 percent. Per capita income has fallen by $5,000. Five years of austerity and crisis have also taken a psychological toll: the suicide rate in Greece has jumped by 35 percent. 200,000 people have left the country in search of better work opportunities; not all will return.

For Puerto Rico, the worst is yet to come. Unemployment is 12.4 percent, but only 40 percent of adults participate in the workforce, compared to 63 percent in the US as a whole. Between 2004 and 2013, Puerto Rico lost more than 5 percent of its population to emigration, most to the U.S. mainland. Puerto Rico currently owes $37 billion in pension obligations to current and former workers, money that may never be paid. Because Puerto Rico can’t file for bankruptcy, it may be forced to pay back investors and bondholders before the island’s policemen, firefighters and teachers.

Possibility for Contagion

Greece and Puerto Rico plainly pose dangers to themselves. Their stories diverge in the danger they pose to others. The risk of contagion remains at the heart of the Greek crisis. Europe has spent the last five years firewalling its banks from exposure to Greece, systematically moving to ensure that governments, not banks, own the debt. Greece owed $198 billion to banks in of the spring of 2008. In 2014, that figure had been reduced to less than $19.5 billion.

The real underlying fear is that a “Grexit” might set a precedent for the euro. Greece would be the first country in history to leave the currency union, seriously undermining the euro’s credibility as a stable global currency. That explains why a country accounting for just 1.8 percent of the eurozone’s economic output is getting so much attention.

In contrast, Puerto Rico does not pose an existential threat to either the U.S. federal government’s bottom line or the credibility of the dollar. Puerto Rico’s entire annual output is around $103 billion, or less than one percent of the nearly $16.8 trillion the U.S. as a whole produces. That’s why most U.S. politicians are slow to respond to Puerto Rico’s predicament. The risk falls mainly on Puerto Ricans who rely on government services and investors with exposure to Puerto Rican debt. Hedge funds have invested about $15 billion in the territory, while bond mutual funds have exposure of $11.3 billion. National politicians want Puerto Rico to reach a deal with creditors before considering a politically unpopular “bailout.” Ask Europe how well that’s going for Greece.

No Exit?

An independent country with control over monetary and fiscal policy can recalibrate exchange rates to ease financial troubles. Neither Greece nor Puerto Rico has this option. That could still change for Greece. Last weekend’s referendum puts continued Eurozone membership in limbo. A Reuters poll of economists now puts has the probability of Greece leaving the eurozone at 55 percent, the first time it has passed the 50 percent threshold. Whether Grexit would solve Greece’s problems is a matter of much controversy. For the moment, Grexit appears to have been avoided, though we surely haven’t heard the last of this debate.

Puerto Rico, on the other hand, has nowhere to go. In a 2012 referendum, just 6 percent of Puerto Ricans said they wanted to independence from the U.S.

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