Journal opinion article - Essay Example

Puerto Rico debt obligations have ashamed the debt obligations of Detroit. Detroit which had 7 hundreed throusand residents went bankrupt for piling up debt obligations of 18 billion dollars which were not serviced. In comparison to this, the condition of Puerto Rico is severely devastating with the figures of debt obligations that are unfunded in various obligations and pension funds of 3.5 million residents remaining unserviced. The debt obligation has grown to a whopping amount of 87 billion dollars and the government has reached a situation where they are going to run out of funds.

The island of Puerto Rico has been expecting a bailout from the US administration in order to save their economy. However, real facts indicate otherwise with news of the US brokerage firms advising investors to stay out of investing in the bonds of Puerto Rico that they plan to use to finance their debt obligations. In order to attract the investors, Puerto Rico has issued bonds with a forecasted yield of 9.29% which exceeded that of Greece. For this reason, Puerto Rico is being referred as Greece of America.

In 2008, the measures taken by the government to stabilize the economy created a situation of debt trap for the territory of Puerto Rico. The governor at that point of time undertook measures like cutting down government jobs, reducing income taxes to half as well as reducing the corporate tax rate by about 9%. These measures were undertaken by looking at the limitations of government in funding the economic investments and their abilities to meet the level of expenditure with an eye on the treasury.

The steps were also taken to maintain an optimum level of liquidity in the economy and contain inflation by restoring a balance between the demand and supply in the economy. The level of government job cuts reduced the expenditure of the government in terms of payment of salaries. Although this provided relief to the policy makers in the short term, the government job cuts also led to decrease in production volumes. The decrease in production volumes meant that the supply of goods and service decreased.

The slowdown of the GDP led to the reduction in the earnings of revenues of the government. Although, the government of Puerto Rico tried to maintain stability by injecting liquidity in the economy through reduction of corporate and individual taxes, the slowdown of the income level and the earnings meant that the investments and the demands also deteriorated. The revenue earnings of the government suffered and the treasury volume got depleted over a period of time. Due to this debt trap in Puerto Rico, the government ran out of funds and the economy headed towards a debt crisis.

The debt crisis of Puerto Rico is slightly different from that of Greece due to the fact that a major part of its debt obligations are long term. Due to small short term debt obligations, the territory would get some more time to restore its financial status and recover from the debt obligations. The government has also taken austerity measures to control the situation of debt crisis. This includes an increase in the contribution of the state from 8.275% to 10% in the pension plans. By doing this, Puerto Rico had planned to get more funds in the pension schemes that could be used to service the debt liabilities and the long term maturities could be paid with the restoration of economy in future.

The measures taken by the