Today, I use a practical example from abroad to illustrate in detail the devastating impact of the debt crisis on a place.

Is this island beautiful? Sunshine, beaches and large green lawns make people feel like a paradise on earth. This is a Caribbean resort: Puerto Rico.

Many people may just have heard of the name Puerto Rico. This is normal, after all, it is far from Asia and the place is not big. As can be seen from the above map, Puerto Rico is located in Central America and the Caribbean, not far from Cuba, Haiti and domenico. The island of Puerto Rico covers an area of about 9,000 square kilometers, with a population of about 3.5 million and a per capita GDP of about $34,000. Its capital is called San Juan.

Many people may not know that Puerto Rico is actually part of the United States. Puerto Ricans hold American passports and the local currency is US dollars. But Puerto Rico is very different from other States in the United States, such as Miami and California. Legally, the definition of Puerto Rico is ironic, and it is called a foreign country in the domestic sense.

I know it may be painful for you to see this: which broad-minded lawyer wrote these legal provisions? There are some historical reasons (Spanish-American War, overseas colonies). Although Puerto Rico belongs to the United States, Puerto Rican citizens have no right to vote for the president. Other areas with similar legal status include Guam, the Northern Mariana Islands and the United States Virgin Islands.

Although Puerto Ricans are second-class American citizens in law, it is precisely because of their special legal status that they have also received many special policy preferences. Because Puerto Rico doesn't have to follow federal laws like mainland States, it can formulate its own tax rate policy, and Puerto Ricans don't have to pay the income tax formulated by the US government like real Americans. In fact, Puerto Rico has long been a tax haven for the wealthy Americans: for example, it has no capital income tax and only 4% value-added tax.

In addition to tax avoidance for the rich, the unique tax rate system enjoyed by Puerto Rico has also attracted many companies to settle here. In fact, many very large pharmaceutical companies choose Puerto Rico as their production base, mainly because there are tax incentives for setting up factories there. As can be seen from the above figure, in 20 13 years, 6 1% of Puerto Rico's GDP came from pharmaceutical enterprises.

A large number of pharmaceutical companies have also driven the local economy. For example, the BBC once reported the "Viagra Town" in Puerto Rico. Puerto Rico used to be the largest production base of Viagra in the world.

But it didn't last long. There has been a debt crisis in Puerto Rico since 2006. There are many reasons for this debt crisis, such as weak economic development, the government's inability to make ends meet, and the US government's preferential tax policies for Puerto Rico. Nearly ten years have passed since 2006, during which Puerto Rico has experienced a human tragedy.

The first is the economic situation of Puerto Rico. As can be seen from the above figure, Puerto Rico has been in economic depression (negative GDP growth) almost every year since 2006.

Due to the economic depression, the local unemployment rate in Puerto Rico has risen sharply. As can be seen from the above figure, since 2006, the unemployment rate has soared from 10% to around 16%.

On the one hand, due to the economic depression, the government's income is declining, on the other hand, it is difficult to reduce the government's expenditure. As a result, the Puerto Rican government has been running a deficit for many years, making ends meet.

Puerto Rico has the highest poverty rate in the United States. Nearly half of the people live below the poverty line, far higher than other States.

In this case, the Puerto Rican government had to make ends meet, and borrowed heavily to maintain its own operation and the daily expenses of the local society, especially the expenses of public facilities such as schools and hospitals. By 20 15, the total debt of Puerto Rico will be about $70 billion, accounting for about 70% of the local GDP. In 20 14, many American rating agencies downgraded Puerto Rican bonds to junk bonds. 2065438+In August 2005, the government of Puerto Rico defaulted on government bonds, unable to repay the debt of 58 million dollars.

Around the huge debt that Puerto Rico can't repay, all stakeholders are involved in an invisible war.

About 36% of Puerto Rico's total debt of $70 billion is held by vulture funds in hedge funds. The so-called vulture funds refer to hedge funds that buy risky bonds at a discount price and then force debtors to repay them through legal means, and get high returns in a short time. Many vulture funds are very active in the debt crisis of Argentina, Greece and Mexico. Therefore, it is not surprising that they appeared in this Puerto Rican debt crisis.

First of all, Alejandro javier garcia padilla, the chief executive of Puerto Rico, has repeatedly stated publicly that we have no money to pay our debts. The slogan this officer likes to use is: this is not politics, this is mathematics! Wu Zhijian Translation: This has nothing to do with politics. This is simple math. The implication is that I just have no money to pay back.

But their creditors and hedge funds are not easy to mess with. Centennial Group, one of the larger creditors, issued a report 20 15 in July, calling on Puerto Rico to have a better solution. This report written by three IMF economists carries a lot of weight.

In the report, three economists analyzed the economic situation of Puerto Rico and pointed out that there are actually many ways for Puerto Rico to increase its income and reduce its expenditure, thus paying off its debts.

Among their many suggestions, one is more controversial: cutting school expenses. Three economists drew the picture above, pointing out that the education expenditure in Puerto Rico has increased year by year in the past few years, but the number of children attending school has decreased year by year. Therefore, we can consider reducing expenditure on education (for example, opening fewer schools).

When this proposal came out, public opinion was in an uproar. For example, the headline of the Guardian in the above picture reads: Hedge funds tell Puerto Rico: Close your schools and pay us back!

I guess when you see this, you might think of this scene.

In fact, to be fair, it may be unfair for hedge funds to be singled out for negative teaching because of this debt crisis. First of all, from a legal point of view, it is not wrong for creditors to ask debtors to pay their debts. This is a normal legal and commercial relationship. Secondly, Puerto Rico's debt crisis was not frozen in a day. There are many reasons for this situation, such as its simple economic structure, the need to import a lot of energy, inefficient government management and excessive government debt. But one of the main reasons is the default of the local government.

For example, the basic annual salary of local teachers in Puerto Rico is about $24,000, while the annual salary of junior government officials is $74,000. Puerto Rico's Treasury received a 44% tax gap. In other words, if the Ministry of Finance does a good job and collects taxes seriously, their government revenue can at least double. The government official gave a speech everywhere, telling everyone: We have borrowed too much money. Ironically, didn't he make a decision to borrow money?

See here my mood is like this. Regrettably, the life of local residents in Puerto Rico is much more miserable than that of this Chief Executive. For example, more than 100 schools have been closed in the local area, and there is not even enough power supply in the hospital for them to complete an operation. On average, one doctor leaves Puerto Rico every day, so you can imagine how scarce the local medical resources will be.

Having said that, I hope I can give you an intuitive feeling. If a local government falls into a local crisis, it will be a very terrible thing. On the one hand, powerful creditors are collecting debts there, on the other hand, irresponsible governments and officials are kicking the ball and demanding breach of contract. In this torn war, the most pitiful people are probably ordinary people: schools are closed, hospitals are unsustainable, public services such as police and fire fighting will be affected one after another, and the unemployment rate is getting higher and higher. Naturally, the crime rate will continue to rise. This is a vicious circle. After entering this black hole, it will be much more difficult to climb out.

I hope it will help everyone.

References:

Wu Zhijian: Little Turtle's investment wisdom: How to overcome the strong with the weak in investment?