1 September 2015. PenzaNews. The default of Puerto Rico, first in the 117 years of their free association with the United States, is a sign of a deeply ingrained crisis that may be resolved only by providing the island the rights to conduct free economic policy, concludes Emma Scully, research associate at the Council on Hemispheric Affairs, in her article “Puerto Rico: The financial implications of dependency” published in the foreign media.

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In early August 2015, the Puerto Rico Public Finance Corporation failed to prevent the technical default on a $58 million US bond payment, she recalls.

“To [the former IMF vice president Anne] Krueger, Puerto Rico’s problems stem from the commonwealth’s too high minimum wage and overly generous welfare benefits. A somewhat less reticent report sponsored by a group of hedge fund managers, who control a significant chunk of Puerto Rican debt, recommended outright austerity measures such as making sharp cuts to education and health care,” the author points out.

However, in her opinion, such advice would not pave the way out for Puerto Rico as the main issue lies in San Juan’s absolute dependency on Washington’s “colonial” economic policy.

“[From the first day under the American rule] Puerto Rico has been steadily transformed into a reserve for US capital. The process got a boost in 1899 when Hurricane San Ciriaco destroyed the island’s farmlands at a time when coffee was the principle export. US banks swooped in and began to loan money to impacted coffee farmers, but, in lieu of any usury laws, extortionate interest rates led to mass defaults and farm foreclosures,” Emma Scully explains.

According to her, the aforementioned events led to sugar exports to the US becoming the main source of income for the country by 1901, and by 1928 the industry was dominated by the American subdivisions that controlled the largest production facilities and the majority of arable land.

In the analyst’s opinion, the United States abused its influence on the island’s economic policy to gain total control over it, and the 1917 Jones Act that allows import and export to be conducted only on vessels under the US flag is a bright example of this behavior.

“As the Center for the New Economy points out, in Puerto Rico today ‘both production and consumption are dominated by the foreign sector,’ and, therefore, ‘most of the income derived from the manufacturing and sale of exports accrues to and is repatriated by absentee owners, with little impact on the local economy.’ In addition, Jacobin Magazine notes that ‘a substantial amount of wealth created in the island is extracted and not reinvested,’ and about one-third of the island’s GNP is ‘repatriated back to the US’,” Emma Scully writes.

She also points out that the authorities of the island has placed great tax burden on the poor population and businessmen in an attempt to improve the situation, but instead only brought it lower.

“Due to the tax breaks on US subsidiaries in contrast to the island’s high domestic corporate tax rates, Puerto Rico never had the opportunity to develop its internal private sector. As a result, when [the tax break] expired, the government became the island’s largest employer but found itself in desperate need of investment to fund its projects,” states the research associate of the Council on Hemispheric Affairs.

In 2012, the former authorities led by the governor Luis Fortuño attempted to attract more investors by lowering the tax rate for hedge funds and introducing full tax exemptions for the investors who lived on the island for half a year, she notes. However, the new conditions brought the country in the focus of the so-called “vulture funds” – speculative investment organizations that buy cheap bonds and make billions on the predicaments of the countries teetering on the verge of a crisis.

To prove her point, the author quotes CNN Money and the Puerto Rican Center for Investigative Journalism that say the hedge funds already amassed at least $15 billion of the country’s debt.

“One can be certain that these investors will keep close watch over any payment plan or debt restructuring in order to guarantee themselves a substantial profit. Indeed, hedge and vulture funds have already begun lobbying against any measure that would enhance the Puerto Rican government’s autonomy to seek a measured plan for handling its growing debt,” Emma Scully stresses.

She also mentioned that an attempt to restructure the debt in 2014 caused by the country’s inability to initiate bankruptcy led to a failure.

“A group of investors, who at the time held about $2 billion of the Puerto Rico Electric Power Authority’s debt, sued the commonwealth in federal court, claiming that the law would interfere with their contractual rights. In February, the court struck the recovery act down as unconstitutional,” the author explains.

A similar situation occurred in Argentina about a decade ago, when the South American country was forced to default on its debts twice under the pressure of “vulture funds,” all while the White House officials declined to provide any real help to Buenos Aires, she recalls.

“The Argentinian economy remains deeply troubled as the government is forced to make 100 percent repayments for bonds that were bought at a fraction of the price,” writes the research associate at the Council on Hemispheric Affairs.

In her opinion, the inaction of the White House is due to the permanent lobbying of the US officials by the influential investors, such as the billionaire Paul Singer or the former Assistant Attorney General, executive director of American Task Force Argentina Robert Raben.

“The forces of big capital often override a US policymaker’s principles of sovereign rights and fair diplomacy,” the analyst states.

From her point of view, austerity will not help it if San Juan, already under pressure of the US capital and “vulture funds,” would not gain any right to choose its economic course on its own.

“United States’ colonial policies imposed on the island throughout the past century have turned Puerto Rico into a haven for cheap manufacturing. No amount of micromanagement of the ailing economy, by the IMF or by independent hedge fund managers, can cure Puerto Rico’s crisis,” Emma Scully thinks.