Puerto Rico: Lessons Learned from Greece

Currently, Congress is making a proposition to extend US governmental territories laws to Puerto Rico’s, it could benefit Puerto Rico’s bankruptcy procedures to structure its bond issues in an orderly manner, providing a legal framework done while avoiding the mistakes that were done to Greece.

Puerto Rico’s Situation
In exchange for bankruptcy protection Puerto Rico has to agree to the oversight board that would assure the full implementation of its fiscal commitment. If this is agreed upon Puerto Rico will avoid a tragic economic fate (like Greece) and get creditors to get repaid a higher proportion of their loans which their debt is $70 billion. Since Puerto Rico doesn’t have its own currency rate (similar to Greece) causing it to not be able to collect interest rate as an offset to the contractionary effects of budget tightening on aggregate demand (the total demand of goods in an economy at any time).

Similarities to Greece
Looking at what has happened to Greece, Congress’s policy needs to respond to the possible threats that may happen to Puerto Rico. Since there is a 45% domestic poverty rate and many of the islanders have been moving to the mainland to escape their poverty. Both Greece and Puerto Rico borrowed a large from the capital market in large quantities and they both borrowed poorly causing public financial imbalances to increase leading to structural economic reforms to the weak country.

Lessons learned
The International Monetary Fund has taken a closer look to see what the problem actually is, leading to an early look at what is happening to Puerto Rico’s debt. What happened to Greece’s economy was because the IMF didn’t correctly recognize the problems an example was that they didn’t recognize in 2010 that Greece was suffering from a solvency, rather than a liquidity, crisis.

– Katherine Domingo Chavarria

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