MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The current bailout from international creditors expires today for Greece. What happens over the next few days could have wide-reaching economic consequences. Closer to home, the governor of Puerto Rico has said that island is more than $70 billion in debt and there's no way it can pay.

MS. DIANE REHMHere to talk about concerns over the financial situations in Puerto Rico and Greece, what they could mean for the U.S. and international economies, Greg Ip of the Wall Street Journal, Anna Gelpern of Georgetown University and Matthias Matthijs of the Johns Hopkins School of Advanced International Studies.

MS. DIANE REHMAnd I'll look forward to hearing your comments, questions throughout the hour, give us a call at 800-433-8850. Send an email to drshow@wamu.org. Follow us on Facebook or Twitter. Thank you all for joining us.

MR. GREG IPGood morning, Diane.

MS. ANNA GELPERNGood morning. Thank you so much.

MR. MATTHIAS MATTHIJSIt's an honor.

REHMGood to have you all here. Matthias, Greece has less than eight hours before time runs out to make its payment. Tell me what actually happens at that time.

MATTHIJSIn eight hours? Well, it looks like Greece is not going to pay. Yanis Varoufakis is the finance minister of Greece, has said that Greece won't pay, point blank. Events are unfolding right now in Europe as we speak so there's a tremendous amount of uncertainty. There may be a last-minute deal where Europe promises to pay that amount for Greece, but it's not clear that it's going to happen. I think it's not going to happen.

MATTHIJSSo what happens at that moment, at midnight, is that the Greeks will be in technical arrears, which will actually be a first for a developing country -- for a developed country, excuse me, for this to happen. So this puts Greece in the company of Zimbabwe and Cuba or something like this.

REHMGreg Ip, what do you see happening?

IPProbably nothing. Going into arrears with the IMF is, obviously, bad reputationally, but it's not like 2009/2010 where the majority of Greek debt was owned by banks and foreign investors and the prospect of Greece, a developed, rich country defaulting on the debt just sparked panic. There were fears that banks would go bust because they had -- they owned these Greek debts and there were fears that what would happen to Greece would soon happen to Italy, Portugal, Spain, Ireland.

IPThose fears are largely absent now because the debt has been heavily written down and most of it's owed to the IMF, to the European bailout fund and to the European Central Bank. So the mere fact that Greece goes into arrears with the IMF has not broader repercussions. It does add complications in terms of producing a long term plan to get out of the fix that they're in. The whole reason they're going into arrears is because they have spent the last four months arguing, unsuccessfully, to come to some kind of new bailout agreement, which would unlock the funds that would've avoided this situation.

IPAnd we just do not see the path forward under which such an agreement can be reached prior to Sunday's referendum.

REHMAnd what about this referendum? Why has it been called?

IPBecause essentially, the Greek government that was elected in January was elected on a platform of repudiating the austerity and reform measures that the prior government had agreed to as a condition of its bailout from Europe and the IMF. Since then, they have repeatedly tried to come to some sort of compromise with the creditor nations saying, we'll try and reduce our budget deficits, but we don't want to make the wrenching moves that you're asking for us.

IPAnd they simply could not come to that agreement. The creditors held the lines, said, no, your prior governments agreed to this. If we let you off the hook, we have to let all these other countries off the hook, which are, right now, adhering to their programs.

REHMSo if Greece decides not to pay and to declare its debt unpayable, then what happens to Greece and the euro?

IPIt's very complicated because you actually have two different messages being given to the Greek people about the meaning of this referendum. This (word?) government is saying, we're only asking you to vote yes or no to the bailout program that the creditors want to force upon Greece. If you say no, and we want you to say no, you can still stay in the euro. The creditor nations, European Commission, the IMF are saying just the opposite.

IPIf you say no to this, then where are you going to get your money? If you can't get money from us, you're going to have to print it, which means that you have to leave the euro. So very much the outcome of this referendum will depend on how Greek voters interpret the consequences of their vote.

REHMDo you see it the same way?

MATTHIJSYeah. I think Alexis Tsipras was desperate in the end and in a way, a political stroke of genius to call this referendum because he said, on the one hand, we cannot agree on this. We don't have a mandate to agree on this, but, you know, if this is all we can get from Europe, we'll put it to a vote. So he managed last weekend to frame the crisis narrative around they're being completely.

MATTHIJSThey're the ideological ones, right? I mean, most economist agree with our analysis. So either you vote no, we advise you to vote no because we cannot -- we don't want to implement this or you vote yes and then we will do what you tell us to do. What's now happening is that the Europeans are trying to reframe the crisis narrative and there's mixed messages given where they're saying, you vote no, that's a no to Europe. That's a no to the euro. You're out.

MATTHIJSAlthough, the German finance minister has been very careful to say, even if they vote no, it doesn't necessarily mean that they're out of the euro yet. So there's a tremendous amount of uncertainty at this point.

REHMConfusion...

MATTHIJSYes.

REHM...as well. Anna, how do you see it?

GELPERNWell, I find it similarly confusing, but something you said earlier is very important, which is if they say they're not paying, if they say they're walking away. Well, there are many ways of walking away, right? So if they say, that's it, we're out, then certainly it's a big rupture and huge disruption. But what I am seeing happening over the next few days and maybe even few weeks is just more buying a little bit of time, buying, you know, well, we're not really walking away, but rather we're, you know, we're continuing to negotiate.

GELPERNSo this mixed message that you hear the government articulate, we're not really saying just say no. We're saying, just say no so that we could ask for better terms.

REHMAll right. So Anna, tell me how Greece's economic situation is similar to or different from that of Puerto Rico.

GELPERNWell, I find the comparison fascinating because both Greece and Puerto Rico are examples of not quite sovereign governments, right? So Greece doesn't have control over its money, which puts it in the situation that Greg described. But it's not quite in a fiscal union with Europe and the political union and the banking union in Europe are incomplete. Whereas Puerto Rico is a sovereign government that is deeply indebted, but it is completely enmeshed in the U.S. political, economic and constitutional fabric.

GELPERNSo you have a sovereign that's not quite a state like Illinois or California, not a municipality like Detroit and yet, it's in a fiscal monetary and constitutional union with the U.S.

REHMHow did Puerto Rico arrive at this situation?

GELPERNOh, it's been a long time coming and they have -- so most people date this back to the expiration of a tax exemption that allowed a lot of manufacturers from continental U.S. to locate in Puerto Rico. So around 2006, that was phased out and they certainly lost a lot of manufacturing and...

REHMBecause they no longer have that tax exemption.

GELPERNExactly. Precisely. But that's really only one of many structural problems that the Puerto Rican economy has. So they have a very large public sector. They have very high unemployment, persistently so. They have very high energy costs, low wages. They've been losing population since 2006.

REHMBut what you're saying is before all those companies lost their tax exemption, how was unemployment then? Was it fairly low, fairly reasonable?

GELPERNYou know, it was -- I don't have the numbers at my fingertips, but it was certainly better than it is now, but I think that it's not -- I think it's a mistake to point to that one event as the one and only cause.

REHMDidn't they also lower taxes quite substantially?

GELPERNYep. But then, they've also -- they've imposed some taxes since 2006 and that allowed them to borrow in the markets backed by that tax revenue. So in a sense, they also started borrowing more when they lost those tax revenues to replace the money.

REHMI see.

GELPERNRight? So that, of course, led debt to sky-rocket. It went from something like, you know, $30 billion in 2003 to more than $70 billion now.

REHMSo unlike Greece which, if it walks out of the Eurozone can begin to print its own drachmas, Puerto Rico can't print dollars to help itself out.

GELPERNIt's too far in. I mean, you know, everybody can't print a little bit of something. You recall when California had a fiscal crisis, it printed IOUs to pay some of its -- some state workers. So everybody can do it a little bit, but this is not a question of Puerto Rico exiting its union with the U.S. It's too far in. The banks are all supervised by the FDIC, part of the U.S. banking system. It's all too close.

REHMAnna Gelpern. She is professor of law at Georgetown University as well as with the Peterson Institute for International Economics. We'll take a short break here. I'm interested to hear your thoughts about both Greece and Puerto Rico. Stay with us.

REHMAnd welcome back. We're talking about the serious debt situations in both Greece and Puerto Rico. Before we go further, Matthias, what are the roots of Greece's problems? How did they get in this mess? And how big a role did the 2008 recession play?

MATTHIJSYeah. So from the very beginning, when the Greek crisis began, which you could really trace back to late 2009, early 2010. There were two fundamentally different crisis narratives that I think emerged. The first one, I think, is the more conventional German one, is that this is a kind of a national problem of Greece -- of overborrowing, of lack of competitiveness, of too much debt, bloated public sectors, too low pension ages, too generous pension systems, too long holidays, that kind of stuff. And so what's the solution then is of course a combination of austerity and reform.

MATTHIJSI think the more Anglo-Saxon line that most British and American analysts, economists and newspapers have taken is that this is a systemic crisis -- a crisis of European design. That here you have a monetary union without a fiscal, political and financial union. And I think it's mainly the financial union that was problematic, right? Because Greece could borrow so cheaply from '99 -- from 2002, when it joined the euro, onwards. And so that kind of artificially allowed the Greeks to borrow so much. But it's a little bit like the subprime crisis in the United States, right? Who's to blame? The borrowers, the people that should have known better but, you know, bought houses that they couldn't afford or the ones that told them that they could afford them?

MATTHIJSSo is this a story of predatory lenders or a story of, you know, hapless borrowers? And I think that's the systemic part of the Eurozone crisis, that you do have both that are in place.

REHMGreg.

IPYeah, and I think also, one of the tragedies of Greece is that they have ended up being the political football for competing narratives. So when they first got into trouble in 2010, their debts were pretty obviously not repayable at that time. But the European Central Bank and the IMF were terrified that if Greece defaulted at that time it would create a systemic event, as all these banks that held Greek debt ended up going bust. So they papered over the problems. They pretended that Greece could pay back its debts with just enough austerity. They imposed this savage austerity program on Greece with Pollyannaish assumptions about how much it could grow. And it was essentially doomed to failure.

IPWorse than that, they then said, "Whatever happens to Greece is going to also be allowed to happen in Italy and Portugal and any other country that gets into trouble." So investors naturally said, "Well, if Greece can go bust, all of Europe can go bust." And you went from a Greek-only problem to a continent-wide problem that pushed Europe into a second recession, which made everything that much worse. And so I think, to take -- to follow on Matthias' point, one of the problems with this whole story is that whose narrative do you believe?

IPIs it the fault of the Greeks because they basically were like a teenager with their parents' credit card and they borrowed too much? Or is it the fault of the parents, the rest of Europe, for then, you know, cracking down on them with all this kind of like Old Testament justice? Well, as in most of these complicated stories, it's a little bit of both.

MATTHIJSThe most schizophrenic in this story now is the International Monetary Fund, right? They have -- it's French versus French. You have Christine Lagarde who's taking the political line, who's being very tough on Greece, because that's what she needs to do politically, especially not just from the Europeans but also from the other -- the BRICS countries. But you have Olivier Blanchard, her chief economist, who's repeatedly and for three years now said, "This isn't working. Austerity is killing the patient." It's like, let's say, somebody who is a manual worker, who owes you a lot of money. And you say, "Okay, you need to pay me all that back," even though you think he probably can never earn that amount of money.

MATTHIJSBut at the same time, you're going to cut off his both -- both of his arms. And that way he -- the thing that allows him to services that -- will it make it even harder? And so that's where the tension is now between economists who clearly know that this isn't working. And everybody by now agrees on this. And the political -- the domestic politics of Europe, where they say, "Listen, we've done our reforms." And it's especially pressing in a country like Latvia. Everybody looks at Germany. But the Germans say, "Listen, Latvia did this before joining the euro. They had a depression of 20 percent of GDP. They had the real internal devaluation that they now say the Greeks should do this too. So there is no sympathy coming from other countries that have done these reforms and that have done these cuts.

REHMAnna.

GELPERNWell, so IMF actually is a very important actor in all of this and one in a terribly awkward position. The IMF is used to being in charge. The IMF is used to being the dominant source of financing for a country in crisis and calling the policy shots. In this case, the IMF was a junior partner and has been constantly adjusting to European politics, and not doing a terribly credible job of it, frankly.

REHMAnd how do you separate what's happened in Greece from what's happening in Puerto Rico, Greg?

IPThere's certainly a lot of really intriguing superficial similarities. This chronically uncompetitive economy on the southern edge of a really big, rich economy, unable to devalue, which is the usual way you get out of a competitiveness problem. But, that said, I don't want to overdraw the comparison. Greece is a serious an issue for Europe because of the fear that if Greece goes, Spain is next, Portugal is next, Italy is next. Euro is only 15 years old. There's a lot of fear that if Greece goes, then the irrevocability that surrounds the notion of monetary union is shattered and there goes the European project. As bad as things are in Puerto Rico, nobody thinks that Puerto Rico's default is going to cause any other states to leave the U.S. union.

IPI mean, in Puerto Rico, itself, there's almost no support for independence. Puerto Ricans, in the last referendum, more or less divided between those who wanted to maintain the Commonwealth status and those who wanted statehood. So as bad as Puerto Rico's problems are for Puerto Rico, the consequences for the rest of the United States are pretty limited. That's why Puerto Rico is very different from Greece.

REHMMatthias.

MATTHIJSYeah, the main difference really is that the United States and Puerto Rico being part of the United States started out as a political union. And it started out with the equivalent of a Eurobond. I mean, everybody talks about Alexander Hamilton these days and the $10 bills. But Hamilton created the common debt instrument. He took on the revolutionary debt of the states and the federal debt. That was mutualized from the very beginning. The U.S. then had a -- it's common currency in 1863 and only it's common Central Bank in 1913. Europe is trying to do it exactly the opposite way. And so people aren't sure that now, you know, the rest of Europe stands behind Greece, right?

MATTHIJSAnd while, in Puerto Rico, I think that's not the main problem. What we were mentioning earlier is the main difference, is that most of the Puerto Rican debt is owned privately. Most of the Greek debt today is owned publicly, mainly by the ECB, the IMF and European governments.

REHMAnna.

GELPERNWell, the other piece of it is that we're earlier on in the crisis, right? So in 2010, 2012, most of Greek debt was in private hands. And then they had a debt restructuring, which reduced it drastically. And now this is, of course, mostly a public debt problem and therefore a much more politicized problem. Now, in Puerto Rico, people are just waking up to the fact that bonds that, you know, were yielding 8.7 percent might not be repaid in full and on time. This is the first wake-up call. And the other funny thing about it is that the federal government, although certain Puerto Rico is part of the federal fabric, has said, "We're not bailing you out."

GELPERNThere is no Federal Reserve facility, there's no U.S. Treasury Fund waiting to give money to Puerto Rico conditional on a reform program. And the IMF is certainly not coming in. So the shape of their restructuring, who drive the policy, who drives the debt terms, totally uncertain at the moment.

REHMHere's an email from Veronica asking us about Puerto Rico. She says, "Why are we only panicking now with $70+ billion? Why wasn't there this level of public concern a long time ago?"

IPWell, actually, the concern has been rising. In fact, you could trace the origins of the debt crisis with Puerto Rico to the middle of 2013 when Detroit went into bankruptcy. And that awakened a lot of investors in the $4 trillion municipal bond market to the prospect that there are entities out there that will default on these seemingly safe bonds. And since that time, we have seen the interest rates that Puerto Rico has to pay rise steadily and steadily, until they were basically treated like a junk issuer. So in some sense, this should not come as that much of a shock. Unlike, for example, Lehman's failure in the fall of 2008, which did apparently come as a shock.

IPNow, notwithstanding the fact that most of the debt is owed to these private investors, there are very few linkages between Puerto Rico's debt market and the rest of the financial system. To the best of our knowledge, American -- big American banks do not have a lot of exposures to Puerto Rico. So the fact that Puerto Rico won't be paying that -- back that debt, will not endanger the health of the U.S. banking system.

REHMHow do you compare what happened in Detroit to what's happening now in Puerto Rico?

IPWell, they're very similar. I mean, Detroit, like Puerto Rico, was an entity in long-term economic decline, stuck with a shrinking tax base but very large fiscal obligations, especially related to pensions and so on. So in that sense, they're similar. The difference is size. I mean, Puerto Rico's debts are several times larger than Detroit's were. The other difference -- and this is where it turns into a really hairy, ugly mess -- is there is no clear legal framework for Puerto Rico to restructure its debts. Detroit had access to Chapter 9 of the Federal Bankruptcy Code, which covers municipalities. Puerto Rico is explicitly excluded from that, like most states.

IPHowever, unlike most states, Puerto Rico is not sovereign. It does not have sovereign immunity. Therefore, its debt holders can perhaps potentially sue Puerto Rico for payments of its debt, which would not be possible with most U.S. states.

REHMAnna.

GELPERNSo Puerto Rico does actually have immunity. But Puerto Rico is in a very, very different position from both Detroit and -- from both Detroit and American states. Because Detroit is a municipality. Detroit is not sovereign, right? Michigan is sovereign. Michigan, under the U.S. Bankruptcy Code, can authorize its municipalities to file for bankruptcy and prescribe the process and the conditions. Right? Puerto Rico, as Greg said, is excluded. Now, of the $70-some billion in debt, more than 20 is owed by state agencies, state-owned firms and municipalities that would have been able to restructure in Chapter 9, had Puerto Rico had the capacity to authorize it.

GELPERNNow there is a bill pending in Congress that would fix that, that would stick in, basically, the words Puerto Rico in the Bankruptcy Code. The District of Columbia, by the way, is another interesting exemption -- exclusion there. But there is a fair amount of opposition to it and a fair amount of debate about what Puerto Rico's exclusion means.

REHMSo, on Monday, the governor of Puerto Rico called for the Commonwealth to be allowed to restructure its debts under the Bankruptcy Code. And you've got a new appointed advisor to the U.S. Territory saying it is insolvent and will run out of cash. What does that mean?

IPWell, they have a number of Treasury Bills and other bills coming due soon. Now, to the best of our knowledge, they'll be able to make the payments that are due this week. But other payments are going to stack up in the next five or six months. And the kitty is empty. They may not be able to meet those payments. They will de facto be in default, you know, just like Greece, just like, you know, Lehman Brothers.

REHMAnd then what happens?

IPWell, we really don't know. But that is why the governor is actually coming out right now trying to get ahead of the problem and draw its creditors into a negotiation.

GELPERNSo this is a really important point. The governor, on Monday, said, "The debt is not payable." Right? When the debt is not payable, you can't legislate your way out of it. You can't legislate out of zero, right? So the only options are default. And when the government says, "We can't pay." You can pretty much be sure that not everybody is going to get paid in full and on time. So that's a foregone conclusion. So then the question is, how are they going to default? Are they going to default in an orderly, legislative framework? Or are they going to default higgledy-piggledy, we'll see how it works.

REHMAnd what would default mean for ordinary citizens, those workers, those people who live there and try to get money from the bank? What is that going to mean for them?

GELPERNSo this is a terrific question. Now, as far as the banks, it's not going to look like Greece, partly because banks in Puerto Rico are FDIC insured, part of the U.S. Banking System. So you're not going to see pensioners lining up to get, you know, the last dollar out of the bank. But a lot of the debt -- now, Puerto Rico is actually unusual because a lot of its debt is held around the country. Most municipal debt is held internally, because Puerto Rican debt is -- had three tax exemptions instead of one or two, right? But a lot of this debt is held in Puerto Rico.

GELPERNAnd the question is, will the government treat Puerto Rican creditors -- creditors that are on the island -- the same way as it does hedge funds in New York, the same way as it does, you know, mutual funds on the mainland?

REHMAnd you're listening to "The Diane Rehm Show." Now, here's a question from Mark in Washington, D.C. "Could you explain why Greece defaulting and leaving the euro are linked? Why can't they default and remain on the euro, even though they won't be able to continue to borrow?" Matthias.

MATTHIJSYeah. That's really a question for the European Central Bank at this point, right? And that's -- everybody's eyes are on Mario Draghi, the President of the European Central Bank. The moment Greece defaults, the European Central Bank can no longer do day-to-day transactions, where they provide liquidity to Greek banks. They would have to take a haircut or basically cut them off. But that's the moment that basically, you're in a Cypress situation, which we had in the spring of 2013, where a Greek euro is different than Euros from the rest of the Eurozone. And so, de facto, if you want to then recapitalize your own banking system, the Greek government would have to do it themselves, right? Because the European Central Bank refuses to do it.

MATTHIJSSo they would have to start printing their own money. To be honest, the most appealing option -- and I think that's what Syriza is getting at -- most of this debt is to be paid in Euros. The moment they default and they change their currency, they say they never paid us back. But then they also have the added benefit of having a much weaker currency, which could boost their economy in all kinds of other ways, after a couple of months of kind of chaos. But, you know, once the new drachma, say, sinks down, the hope would be that this would spur tourism, this would spur exports and so on. I think that's the thinking that Syriza has.

REHMGreg, if -- yesterday, the U.S. stock market saw its biggest drop in the year. What does all this mean for the U.S.?

IPWell, it simply adds a layer of uncertainty to the global economy that, frankly, we need like a hole in the head. The direct economic impact of Greece on the United States is tiny. It's almost rounding error. You know, Greece is a an infinitesimally small market for U.S. goods and services. All of Europe, in fact, is really not that large. Now, when the Greek crisis first broke out five years ago, it was very consequential for the United States, primarily because of the panic it caused in the financial markets, which spilled over into the United States.

IPMost of those channels of contagion have been closed off, because private investors and banks have very little exposure to Greece right now and because the much larger economies of Italy, Spain and France are protected by the bailout fund that's been created in the meantime and by the European Central Bank's willingness to lend to those countries that are unable to borrow from the private markets.

REHMGreg Ip is chief economics commentator for The Wall Street Journal and author of "The Little Book of Economics: How the Economy Works in the Real World." Short break here. Your calls when we come back. Stay with us.

REHMAnd one question before we open the phones. If Greece votes no, what happens, Matthias?

MATTHIJSWell, I think there is a lot of calm right now in the north of Europe and financial markets that, you know, this won't lead to another Lehman moment. You see, I'm not so sure for two reasons, and that's why I'm actually very worried about this. The ECB can do two things, right. They can get these...

REHMEuropean Central Bank.

MATTHIJSEuropean Central Bank can get Italy into OMT, with OMT, outright monetary transactions, was done in 2012, but they need a structural program for this. Italy is not going to sign up for such a program. So people say yeah, but what's the problem, they're doing quantitative easing just like Bernanke started doing it here. The problem there is that the ECB can only buy bonds every month, 80 billion Euros a month, according to the capital key.

MATTHIJSWhat's the capital key? It's roughly proportional to the size of the economy within the Eurozone. So Italy is a big country, that's one thing, but they have a lot of debt. But Portugal is maybe two or three percent of the whole of the Eurozone. So that means two or three billion a month worth in bonds that can be bought by the ECB, and let's not forget this is a rule-abiding institution with technocrats who are not politically elected. They're not ready to make these political calls.

MATTHIJSSo that's why there's a potential for a kind of conflagration, if Greece votes no, and the markets panic.

REHMAll right, let's open the phones, 800-433-8850. Let's go to Brian in Grand Rapids, Michigan. You're on the air.

BRIANGood day, Diane, and great guests, great show as always.

REHMThank you.

BRIANI'm curious about what might happen in Illinois. I heard a story this morning that the state's hitting the debt ceiling, and how would that affect the American economy?

IPWell, Illinois having problem with its budget is a little bit like, you know, the Washington Redskins having problems winning games. It's not exactly a headline. It's true that you have a situation, a standoff, in Illinois right now, where the legislature basically has submitted a budget, and the governor, a Republican, has said that budget is unacceptable, it doesn't close a very large fiscal gap. And so they're entering the new fiscal year without a budget in place.

IPWhat does that mean? It means that they may have to pay some of their bills in IOUs for the time being. But there's no question of Illinois defaulting on its debt. In fact, I believe payment of its debt is entrenched in its Constitution. Illinois is different than Puerto Rico in the following sense. Nobody doubts Illinois' ability to pay. It's a big, diversified economy. Once its politicians get their act in gear, as they will eventually, as they always will, they have the money and the tax base to pay their debts.

IPThat is not the case in Puerto Rico. In Puerto Rico, it's not a willingness-to-pay problem, it's an ability-to-pay problem.

REHMBut, you know, when you U.S. citizens and people around the world start hearing not only about Greece and Puerto Rico, they hear about Detroit, they hear about questions regarding Illinois, I think it puts everybody on edge.

IPWell, I think it does, and that's why you want to watch carefully to see if there are signs of contagion, if people are beginning to say if it can happen to Puerto Rico, it can happen in Illinois, it can happen in California. But as Anna and I were chatting about just a few minutes ago on the break, you actually haven't seen that happen. In fact, you've seen municipal bonds of other states actually do better in the last 24 hours.

IPRemember, Puerto Rico's debt is roughly equal to 90 percent of personal income. The average for a state is about three to four percent.

REHMOh, I see.

IPPuerto Rico is completely off the charts with respect to the seriousness of its debt situation.

REHMAll right, let's go to Maria in St. Louis, Missouri. You're on the air.

MARIAThank you so much, Diane. I just wanted to offer my perspective. You know, I go to Puerto Rico every year. My mother's family is from Puerto Rico. And I just wanted to say there's a lot of shared blame here. We have to go back in history, though, to the 1950s, where our U.S. federal government decided to put much of its military assets into Puerto Rico for safety concerns. So you have bases like Ramey, which is close to where my grandfather lives, you have those bases that closed down across the entire island.

MARIAAnd right now you only have the Coast Guard in St. Juan, in San Juan. But you also have to look at the pharmaceutical companies that have invested historically in Puerto Rico. About five or six years ago, after Puerto Rico implemented taxes, which are very, very high, you started hearing about layoffs. And so I even communicated with some of our lobbyists here to look at those concerns. They were laying off people like 600 and 700 people at a time.

MARIAAnother issue that Puerto Rico should be concerned about, and the federal government here, is that in many ways Puerto Rico is still subject to Spanish law, and so that makes things really, really difficult when you're trying to put things in place so you can move forward when you're still under Spanish law, it creates barriers.

REHMI don't get that, Anna, under Spanish law?

GELPERNWell, inasmuch as that is the origin of the legal system, but they're very much -- so there's the Puerto Rican legal system, which has some similarities to Spanish law, but they're certainly part of the federal legal system, and it is the federal courts that ultimately will resolve a lot of the questions that arise out of this.

GELPERNBut Maria's exactly right about the deep origins of the problem and the fact that they all come from this complex relationship between the island commonwealth and the continental United States, the history of military bases, the pharmaceuticals, which relates to that tax exemption that was phased out. That's all certainly part of it.

GELPERNThere's something that Greg said earlier that's very important, which is that a lot of states have constitutional guarantees of their debt, and Puerto Rico has constitutional guarantees behind some of its bonds. And one of the questions that's on everybody's minds right now is, well, does that mean more than, say, revenue pledges. Does that mean more than other kinds of assurances? You have different types of debt. It's a...

REHMWhat could the U.S. Congress do regarding Puerto Rico?

GELPERNWell, the U.S. Congress can do many things, some of which are super-simple, and others are incredibly complicated. So the simplest thing is to stick the words Puerto Rico into Chapter 9, which literally then gives Puerto Rico the capacity to restructure $25 billion or so of its debt in an orderly, legal framework. It also gives the Congress and Puerto Rico an avenue to influence policy, right, and the restructuring of these enterprises, which now is very confused.

GELPERNBut then again, the Congress could also treat Puerto Rico as unique and give it authority to file for bankruptcy itself, which is one of the proposals on the table.

REHMAll right, let's go to Eric here in Washington, D.C. You're on the air.

ERICEveryone, and thank you for giving these topics the depth of investigation they deserve. As I recall, widely reported, however only briefly, back in about 2004, in a range of reliable news sources, it was found that the Greeks had not been entirely honest regarding their financial position when they had applied to enter the Eurozone. And perhaps it was a bit of rear-end covering that no one really wanted to talk about it after they got in and wanted to look responsible. But I think we've got a spot where the Central Bank in particular, everyone is sitting there saying, hey, who let the funny-looking wooden horse come in here and sit in the Eurozone.

MATTHIJSYes, Eric, you're obviously not wrong, and that was just around the time when both Germany and France were part of that fiscal sin, where they were at the same time very much breaking the rules they had insisted on themselves. I think it's important to realize that the Greek crisis is a fiscal crisis, as opposed to the other countries, especially Spain and Ireland, where it was much more of a financial sector or banking crisis that spread there. That of course then became a fiscal crisis because the governments had to bail them out, and then it was obvious to point blame to the state.

MATTHIJSThe big difference, though, is I think the support behind the euro that changed. And here the most significant moment is September 2009, when Angela Merkel gets re-elected and swaps coalition partners. People were really worried about Greece in March -- February, March 2009, but the German finance minister at the time, Peer Steinbruck, was a social democrat, and he said if they're in trouble, we will stand behind them. The market's panic went away. It came back when the liberal democrats came to power later that year, and then they said, well, you know, they have to pay their bills, and we can only support them once they go out of the market.

REHMSo what is currently on the table from the international creditors for Greece?

MATTHIJSWell there's -- it depends on who you ask because it's not even that clear. Well, these things are not official. They happen behind closed doors and so on. But what's on the table is basically they want Greece to continue its current bailout program. They want pension cuts. They want further cuts in public-sector spending. They want increases in taxes, for example, for electricity and things like this. But also they want to have -- they want to get rid of the exemption for the very low VAT level, for instance for tourism, which for them is very important.

MATTHIJSBut just one figure to throw out there, 52 percent of Greeks today, 52 of the whole population, depend in some way on pensions, and these are unemployed people on their grandparents or something like this. So the question is now what are they going to do on Sunday.

REHMExactly.

MATTHIJSAre they going to vote for cuts in these pensions, with guaranteed three more years of paying, or are they going to vote for guaranteed chaos for a couple of months with maybe the vain hope that things may improve down the line if they have their sovereignty back. That's really the big question.

REHMWhat do you think they're going to do, Greg?

IPWell, political bookmaking is obviously even more fraught...

REHMBut go out on a limb.

IPSo one thing I think we on this side of the Atlantic often fail to realize about Europe is that the euro is not primarily an economic project. It's a political project. And Greece's entry into the European Union in the 1980s and into the euro in the last decade was less about wanting its so-called economic benefits and more about binding itself into Western Europe's stable economic, democratic, capitalist system.

IPAnd I think that when Greeks come face to face with the possibility that voting no means losing that, I suspect that they will say yes because as awful as life under austerity is, life outside Western Europe, as they suspect that might mean, is worse. I don't doubt that -- I mean, they have really been through a lot. And to go back to the last question just for a moment, what's the big deal about it, there's not very much actually separating the creditors and the Greek government. I mean, it's like a year or two about how fast you accelerate the pension reforms. It's about, like, one or two exemptions on the VAT. I think actually that if they can drain sort of the toxic atmosphere from the negotiations, there is actually hope that they could emerge a few months from now with a more orderly situation.

MATTHIJSHere's a government, though, that was elected to sustain the euro but to get rid of austerity, and these are two incompatible things, right. What we have seen, and I'm very happy that Greg from the Wall Street Journal is saying how committed Europeans actually are to this political project. That being said, what this crisis underscored is that democratic legitimacy, for better or worse, lies with the nation-states. And the Greeks, many Greeks, not all of them, but many, feel humiliated by this, right.

MATTHIJSSo this is about national pride. It's about who gets to say what, and the truth is the European Union has a bit of a problem with democracy, and at the same time, there's 28, 29 democracies, and they all want different things. I mean, all the other countries that want Greece to do certain things also have voters to deal with, right. But that's where we are. But I'm not so sure. I think it could go either way. I think it's 50-50.

REHMAnna?

GELPERNWell, so there's something very peculiar about this referendum when you pause and think about it. The only people it binds, the Greek government, right. It does not bind the European officials who created this policy framework, the IMF. It's really a message from Greece to the outside world. It says look, you know, we will do this to ourselves unless you do something different to make it easier. It's structurally a very odd things.

IPI want to bring up an analogy to the Scottish referendum a few months ago. When the polls started to show that Scots might actually vote to secede, you saw the government, the British government in Whitehall, start to get panicky and begin making all sorts of offers and concessions to the Scots to stay.

REHMPromises.

IPI think the next three or four days will be very interesting. If the polls start to show a rising no vote, it will be interesting to see if the IMF and the Europeans begin to hold out the prospect of better times ahead and concessions if they vote yes.

REHMAnd you're listening to the Diane Rehm Show. Matthias, you wanted to say something?

MATTHIJSI think the analogy with the Scottish referendum is apt. In the end of the day, the middle of the voters that had a lot to lose, and maybe felt very Scottish, said okay, let's not throw the dice, let's not gamble. It's not clear to me that in Greece there's that many people left with that much to lose. There's a lot of unemployed. There's a lot of people who have lost many of their assets. They may say we've done this for five, six years, how much longer can we do this. And there is an analogy with the 1930s, right, where during the period of the gold standard, creditors ruled the show, and internal devaluation, meaning wage, spending cuts and so on, had to be pursued.

MATTHIJSA lot of these countries went very anti-democratic at the time. So I think there is a worry there that -- and that's what Syriza is saying, listen, we're the good guys, we're the reasonable left, maybe not your Tony Blair, Bill Clinton left, but we are much more reasonable than Golden Dawn, which is the most fascist -- this is a fascist party, and that could be next. That's what they're warning against.

REHMAll right, and finally to Victoria in Orlando, Florida, quickly please, we're almost out of time.

VICTORIAHi.

REHMHi there, go right ahead.

VICTORIAYeah, I just want to thank you for your show. I'm sorry you just -- I don't have that much time, but I just want to mention just a few things that...

REHMVery, very quickly, please.

VICTORIAOkay, if someone could just speak to the agricultural in Puerto Rico because of the abandoned buildings, when they left their tax exemptions that they had. The history of Puerto Rico in regards to not being able to vote for their president and the senator, the one senator that I believe we have, can't...

REHMAll right, we'll have to stop right there.

IPWell, let's just touch quickly on the politics, which are very interesting here, because Puerto Rico has traditionally voted Democratic. Their non-voting rep to Congress is a Democrat. The governor is a Democrat. And I think in the context of the Congress right now, which is controlled by Republicans in both houses, this makes a path out of the Puerto Rican mess quite difficult.

IPAs we were talking about earlier, the most logical thing for Puerto Rico to do, and its creditors, is to have an orderly restructuring, not a disorderly restructuring. But an orderly restructuring requires a legislative framework, and we simply don't see at this moment the political will in Congress to deliver that framework. But hopefully that will change.

GELPERNNow Puerto Rico has a backup plan. Puerto Rico enacted its own law to allow its agencies and municipalities to go bankrupt. That was challenged in the federal courts, and we're still waiting for the outcome of the appeal. So there are so many possible ways in which it could pay out.

REHMAnd finally your prediction on yes or no by the Greeks?

MATTHIJSFifty-fifty.

REHMFifty-fifty, all right. Matthias Matthijs, he's assistant professor of international political economy at Johns Hopkins School of Advanced International Studies and author of "The Future of the Euro." Anna Gelpern, professor of law at Georgetown University. And Greg Ip of the Wall Street Journal. Thank you all for a fascinating conversation. Let's hope for the best, and thanks for listening, all. I'm Diane Rehm.