Puerto Rico Governor Driven From Office Amid Record Bankruptcy

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Demonstrators march on a highway blocking traffic during a protest in San Juan, Puerto Rico, onJuly 22, 2019. CREDIT: Bloomberg photo by Xavier Garcia.
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Puerto Rico Governor Ricardo Rossello resigned Wednesday after two weeks of furious protests, throwing the leadership of the U.S. commonwealth into uncertainty as it crawls back from a ruinous hurricane and navigates a record bankruptcy.

Rossello, 40, said in an Internet video that he would leave office Aug. 2. He was undone by popular fury after the publication of profane, vengeful and misogynistic text messages among him and his aides that disparaged foes and ordinary residents of the U.S. commonwealth. The stage was set by corruption investigations that have resulted in the indictment of two former administration officials. His departure plunges the island deeper into uncertainty as it struggles to revive a recession-scarred economy and rebuild from 2017’s devastating Hurricane Maria.

According to Puerto Rico’s constitution, Justice Secretary Wanda Vazquez would be the next governor, as there is no confirmed secretary of state following an exodus of top administration officials.

Rossello’s decision was an abrupt about-face for an embattled governor who vowed to remain in office despite the furor set off by the messages disclosed by Puerto Rico’s Center for Investigative Journalism.

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Over the past week, Rossello became increasingly unable to govern as tens of thousands of protesters flooded San Juan’s colonial quarter for evening protests, where they chanted, banged drums and vented at a chief executive depicted as a prisoner, mobster or goat on their placards. On Wednesday, activists celebrated a people-power victory after newspapers reported that his resignation was imminent and said the next targets would be the federal law known as Promesa that permitted the bankruptcy and established a fiscal oversight board that is pushing for cuts to services and pensions.

“This is the first step toward political democracy,” said Rosa Segui, spokeswoman of the Citizens Victory Movement, begun in March in opposition to the island’s two dominant political parties. “The schemes revealed in the chats question the legitimacy of all the old institutions. Now our demands include the repeal of Promesa and the abolition of the fiscal board.”

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Rossello’s announcement Sunday that he wouldn’t seek re-election and would step down as head of his party failed to quell the outrage, and he was further weakened by the resignation of key staff members. Since the disclosure almost two weeks ago of the text messages, the administration has lost its investment officer, press secretary and two fiscal agency heads — one of whom lasted just five days. The governor’s chief of staff quit Tuesday night. The secretary of management and permits will resign, according to a radio report Wednesday. The treasury secretary was fired last month after disclosing a federal corruption investigation into his department.

The parade of departures promised to strengthen the hand of the federal oversight board. While Rossello has clashed with the board over the budget, such conflicts only underscored Puerto Ricans’ feelings of powerlessness and contempt for politicians whose profligacy drove the territory into ruin. On Tuesday, the board said in a statement that the street protests reflect “a justified crisis of confidence in government institutions.”

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The island, which collapsed into bankruptcy in 2017, built up $74 billion in debt and $50 billion of pension liabilities. The pileup happened because lawmakers opted to borrow money instead of finding ways to balance budgets and fund its employee retirement system, according to a 2018 report by an independent investigator assigned to uncover the causes of the crisis. At the same time, investors were eager to buy up the commonwealth’s bonds, which are exempt from local, state and federal taxes in all U.S. states.

Wall Street greased the island’s path to fiscal debacle, reaping more than $900 million in fees to manage Puerto Rico’s $126.6 billion of bond sales since 2000. After the U.S. territory adopted a sales tax in 2006, investment banks worked with officials in San Juan to create new bonds backed by a portion of the proceeds. These helped the government, which employs more than a quarter of the workforce, to delay cuts.

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The new austerity has meant the closing of hundreds of schools, as well as a halting recovery from the hurricane, which killed thousands. The bankruptcy has left much of the power over the island’s recovery in the hands of the federal court, where the oversight board is planning to soon file a plan for cutting the debt. Retired government workers are uncertain about how their pension checks will be cut because the retirement system has run out of cash.

Prices on most Puerto Rico securities have held steady even amid the political turmoil as investors have grown accustomed to defaults, bankruptcies and destruction and potentially stand to benefit if the federal oversight board’s hand is strengthened. General obligations with an 8 percent coupon and maturing in 2035 traded Wednesday at an average price 53.5 cents on the dollar, up from 52.5 cents before before the indictments and leaked chats, according to data compiled by Bloomberg.

Rossello took office two years ago facing the gargantuan task of revitalizing the island’s economy and reining in its ballooning debts. Rossello also faced the complicated legacy of his own father, former governor Pedro Rossello, who saddled the island with expensive developments while running up its debts as leader of the island between 1993 and 2001.

The governor, who has a Ph.D in biomedical engineering from the University of Michigan, moved back to the island in 2011, leaving post-graduate work at Duke University for a professorship at the University of Puerto Rico’s medical campus. He founded a group advocating more autonomy for the island and began to think seriously of running for governor. He took 42% of the vote in 2016, enough to claim victory in a six-way race.

Rossello told Bloomberg News in a 2017 interview that he was wary of “that one loose screw over here or there to sort of make the whole of government collapse.”

 (c) 2019, Bloomberg · Michael Deibert, Michelle Kaske, Amanda Albright  

{Matzav.com}

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