MOST Latin American capitals are centred around a plaza de armas, a square flanked by a church and government offices. But when Puerto Ricans say they’re going to the plaza, they mean Plaza las Américas, a giant mall that will draw 26m shoppers in 2013—even as the island faces a brutal fiscal squeeze in its seventh straight year of recession. The macroeconomic situation in Puerto Rico is strikingly similar to that of Greece in 2010. It uses an expensive currency it cannot control. Its citizens eagerly dodge paying taxes to a bloated public sector. And its officials protest too much that default is unthinkable. However, there have been no riots or calls for a change of government. Boricuas, as the islanders are known, are too busy spending to take to the streets: since 2006 personal consumption has crept up 2%, while real GNP has fallen by 12%. And local analysts stress that Puerto Rico’s close ties with the United States (it is an unincorporated territory, called a Commonwealth) provide numerous “escape valves”.

The island’s economy has been slowing for decades. After the second world war, America (which annexed it in 1898) weaned it off sugar-cane by offering open access to mainland markets and tax-free repatriation of profits. Along with cheap labour, these perks lured in textile and food firms and, in the 1970s, drug companies. By the 1990s, however, the island’s comparative advantages began to wear out. It began to lose its federal corporate tax break, and had to apply the federal minimum wage. Rivals like Singapore and Ireland competed for pharmaceutical investment, and the United States signed free-trade deals with Puerto Rico’s neighbours.

Doing business there also became frustrating. The informal economy grew to an estimated quarter of GNP, forcing legal companies to shoulder an outsize share of the fiscal burden. The tax code set high rates, but was riddled with carve-outs. Meanwhile, the state electricity monopoly fell captive to its union and suppliers, and lost $383m last year despite charging three times the price of electricity on the American mainland. Faced with all this, the economy fell into recession in 2006.

This downturn occurred just as the Mexican and American governments were cracking down on cross-border drug routes, driving traffickers towards Puerto Rico. The island now handles 40% of the cocaine entering the United States. Dealers found easy targets among the burgeoning unemployed, and cut costs by mixing the coke with Xylazine, a dangerous horse tranquiliser. As drug use grew, so did violence: the murder rate rose by 60% from 2006-11 and the police, despite a taste for brutal tactics, have had little success in stemming the crime wave. Three witnesses have been shot on their way to testify this year. Yet despite this grim panorama, Uncle Sam ensures that Puerto Ricans cannot fall too far. A third of boricuas receive food stamps: they are also eligible for unemployment insurance and Medicaid, though in smaller amounts than in the 50 states. And the 2009 fiscal stimulus included $7 billion for Puerto Rico.

I like to be in America

The other “escape valve” is emigration. Some 29% of those born on the island now live on the mainland. Its population has fallen by 4% since 2000, to 3.7m. The young and jobless are most likely to move. Small communities in the interior are becoming ghost towns.

Unfortunately, this leaves fewer people to pay taxes to the cash-strapped treasury. As the economy shrunk, the government turned to the bond markets, which sopped up paper that was fully exempt from taxation in all 50 states. Investors remained complacent until Detroit went bankrupt in July. Then they soured, and Puerto Rican debt-yields nearly doubled in two months.

The governor, Alejandro García Padilla, had already launched an austerity programme, raising taxes by 1.1% of GNP and making public employees’ pension schemes less generous. That is expected to trim the deficit from $2.2 billion to $800m; it has already made 62% of Puerto Ricans disapprove of Mr García Padilla. Yet investors are still unimpressed. Sergio Marxuach, an economist, estimates that the tax increases will shrink GDP so much that half their fiscal benefits will be negated. Investment has fallen by over 20% since 2004. Mr García Padilla is encouraging medical tourism and will allow rich newcomers to avoid tax on passive income. But he opposes opening the market in electricity distribution, which Eduardo Bhatia, the Senate president, thinks would cut energy costs by $2 billion a year.

If the governor cannot reverse the spiral of recession, austerity and population loss, Puerto Rico’s debts will become intolerable. Some $10 billion of them are protected by a constitutional guarantee, but the remaining $60 billion are backed only by specific taxes or utilities. While those rates could go as high as necessary, the public will be willing to pay only so much.

Congress has little appetite to bail out Puerto Rico. But Mr Obama could probably spare it by simply looking the other way. In 2010 the island placed a levy on firms that sell products to parent companies on the mainland. The Internal Revenue Service now grants a dollar-for-dollar credit against federal corporate tax to the businesses this law affects. As a result, the policy costs the firms nothing, while transferring revenue from Washington to San Juan. Thus Puerto Rico can help itself to as much federal money as it wants by raising the tax. This rule is under review, but for now it represents the island’s greatest escape valve of all.