30 Jun 2015

Puerto Rico and Greece: A tale of two defaults in a monetary union

Daniel Gros

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By the end of June, both Greece and Puerto Rico seem to have arrived at the end of the road. The governor of the Commonwealth has announced that the public debt needs to be restructured (although there are no legal provisions to do so). In Greece, the government is organising a referendum, calling on the people of Greece to reject the latest proposal of its official creditors (the Troika, composed of the IMF, the ECB and the European Commission) for a further adjustment programme.

This coincidence illustrates that the difference between the two cases is not the underlying economic problems, but the political context: in Greece, both the liquidity provision to banks and the debt problems are politically charged because both are in the hands of official institutions. In Puerto Rico, by contrast, both of these issues are determined by the market.

In Greece, the government and the Greek people feel that they have to battle ‘foreigners’, i.e. other political institutions. In Puerto Rico, the government (and the banks) has a problem with anonymous market forces and investors. This is why nobody argues that the ‘dollar’ has failed when Puerto Rico fails, but many argue that the ‘euro’ fails if Greece fails.

Daniel Gros is Director of CEPS.