Analysis & Opinions - Project Syndicate

The Long and Winding Road to a Haircut

Author:

Carmen Reinhart

| Nov. 30, 2017

There are significant differences between Puerto Rico and Venezuela regarding the origins of their economic crises, their political systems, their relationship with the US and the rest of the world, and much else. Nonetheless, some notable similarities are likely to emerge as their debt sagas unfold.

Default is back. Sovereign finances weathered a wrenching global recession and a collapse in commodity prices surprisingly well over the past few years. But failed economic models cannot limp along forever, and the slow bleeding of the economies of Puerto Rico and Venezuela have now forced their leaders to say “no mas” to repaying creditors.

Earlier this year, Puerto Rico declared bankruptcy. At the time, the United States commonwealth had about $70 billion in debt and another $50 billion or so in pension liabilities. This made it the largest “municipal” bankruptcy filing in US history.

The debt crisis came after more than a decade of recession (Puerto Rico’s per capita GDP peaked in 2004), declining revenues, and a steady slide in its population. The demographic trends are all the more worrisome because those fleeing Puerto Rico in search of better opportunities on the US mainland are much younger than the population staying behind. And in September, at a time of deepening economic hardship, hurricane Maria dealt the island and its residents an even more devastating blow, the legacy of which will be measured in years, if not decades.

More recently, in mid-November, Venezuela defaulted on its external sovereign debt and debts owed by the state-owned oil company, PDVSA. Default on official domestic debt, either explicitly or through raging hyperinflation, had long preceded this latest manifestation of national bankruptcy.

While the government and PDVSA owe about $60 billion to foreign bondholders, these entities reportedly owe a comparable (if not larger amount) to Russia and China. According to the International Monetary Fund’s most recent World Economic Outlook, Venezuela’s real per capita GDP has contracted nearly 40% since 2008. By 2022, the cumulative toll is expected to leave per capita income at about half its level a decade ago. Such an economic collapse, rare outside wartime, understates the extent of human suffering implied by the prolonged food and medicine scarcities that plague the country.