Greece is in the headlines today, after voters there rejected the “austerity” measures other European nations had demanded in exchange for yet another bailout of the debt-riddled nation. The 61% to 39% result, supporting the position of the country’s relatively new left-wing government, leaves little doubt as to the Greeks’ stance on the measures and a great deal of doubt as to whether the country can remain in the euro currency zone or even the European Union.
Closer to home, we have an all-too-similar situation that is of less geopolitical importance, although it could have much more impact on how the United States handles what is shaping up world-wide as a century of reckoning with overly generous past promises as they come due.
That situation is playing out in Puerto Rico, where the debt has hit some $73 billion and Gov. Alejandro Garcia Padilla says the island territory can’t make good on all the payments it owes creditors. American bankruptcy law allows municipalities to declare bankruptcy to reorganize their debts, as Detroit and Jefferson County, Ala., have done. But states and territories cannot.
Puerto Rico suffers from some of the same problems as Greece: It uses a currency over which it has no control and which is more attuned to larger, healthier economies; many of its most productive citizens (and businesses) choose to leave for greener pastures; and its government has proven incapable of reining in its finances to bring them into balance, worsening the first two problems. Puerto Rico has the additional problem of facing the same minimum wage set nationally, one thing even Greece isn’t burdened with.
The real problem for the U.S. is not that it has a territory drowning in debt. It’s that Puerto Rico is hardly unique.
As a percentage of its GDP, Puerto Rico’s debt is a little less than 70 percent. The worst states, according to this report by the nonpartisan States Project, are Hawaii (61%), New Jersey (54%) and Ohio (51%).
Puerto Rico’s debt per capita is about $20,300. Taking from the States Report data and extrapolating it based on common GDP and population figures, a number of states blow away that figure: Alaska ($39,600), New Jersey ($33,800), Hawaii ($33,500), Connecticut ($32,300), Ohio ($25,900), Illinois ($25,200), to name a few.
And last but not least, the absolute dollars involved are much larger in some states than the $72 billion Puerto Rico owes: Illinois ($324.4 billion), New Jersey ($302.2 billion), Ohio ($300.5 billion) and — even though it’s in much better shape than Puerto Rico from a debt/GDP standpoint and slightly better off per capita — the biggest of them all, California, at $750.1 billion.
All told, states are estimated to owe $4.5 trillion, in addition to $2.8 trillion of debt for local governments (which, again, are already allowed to declare bankruptcy).
How Congress handles Puerto Rico’s problem will almost certainly shed some light on the future of these similarly profligate states. And how markets react — all that money is, after all, owed to somebody — will tell us whether that solution is sustainable across a nation of debtor states.