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US Refusal to Rescue Puerto Rico Hurts US International Standing

© AP Photo / Ricardo ArduengoA homeless man improvises his shoes with pieces of cloth in front of a closed down business in Puerta de Tierra in the outskirts of Old San Juan, Puerto Rico, Sunday, Aug. 2, 2015
A homeless man improvises his shoes with pieces of cloth in front of a closed down business in Puerta de Tierra in the outskirts of Old San Juan, Puerto Rico, Sunday, Aug. 2, 2015 - Sputnik International
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The US government is not obligated to bail out a bankrupt Puerto Rico, but it will face a severe loss of prestige and confidence if does not, experts told Sputnik.

WASHINGTON (Sputnik) — While Puerto Rico was a very different and potentially much more manageable problem than Greece’s continuing financial crisis, experts argued a failure by the United States to resolve it could cause similar damage to US prestige and long-term international confidence Athens has experienced.

“The US government does not have a well-defined obligation. Puerto Rico did not negotiate successfully with creditors in advance,” retired Northwestern University Associate Professor of Economics Barry Friedman told Sputnik on Tuesday.

The White House has stated the Obama administration does not envision a bailout for Puerto Rico, but the available US federal assistance can be leveraged to assist Puerto Rican leaders.

Friedman noted that Puerto Rico’s local government should be able to resolve the issue within the US legal and financial system in the short term, but will find its long term prospects to enjoy credit and generate future capital will be significantly damaged.

“Now they will wind up in a bankruptcy court to adjudicate claims that may add up to more than the assets backing the debts,” he said.

In most such cases, lenders usually accept less than 100 percent and extend the payout, Friedman acknowledged.

“In any case, it will be harder for the government of the Commonwealth [of Puerto Rico] to borrow in the open market, or the specific agency that borrowed the money against a revenue base.”

The US government, Friedman also pointed out, has so far refused to extend to its own dependency of Puerto Rico comparably generous bailout terms to those it offered Argentina and Mexico 20 years ago.

“It doesn't appear there is a political interest to do that now with Puerto Rico,” he said.

The US taxpayers are already subsidizing health care in Puerto Rico, and the Commonwealth selectively waives business property and income taxes, including for the pharmaceutical industry, he observed.

Therefore, “As [German Chancellor] Angela Merkel said about Greece several months ago, the burden is on Puerto Rico to bring some proposal to the table.”

Woodrow Wilson Center economist Shihoko Goto told Sputnik that a prompt, generous and effective US response to Puerto Rico’s crisis was essential to maintain US financial credibility and standing in the world.

“[Washington’s response] will demonstrate US capabilities to deal with crippling debt crises at home. How it performs will impact its credibility overseas as a financial stabilizer.”

The situation Puerto Rico finds itself in cannot be compared to that of Greece, Goto acknowledged.

“But for Americans, it's an issue that resonates much more at home, not least as more Puerto Ricans head to the US mainland for escape.”

On Monday, Puerto Rico Government Development Bank President Melba Acosta Febo announced that the territory was able to repay only $628,000 of the portion of its debt amounting to $58 million. In total, Puerto Rico owes creditors $73 billion.

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