Puerto Rico’s debt situation
As you already know, Puerto Rico is in a debt crisis. It’s unsustainable – take a look at some of the numbers – and people are suffering. There’s very high prices, few jobs, and on top of that there’s a terrible drought as well. I’m trying this week to learn what some of the details are of this situation, which is incredibly complicated because Puerto Rico is a U.S. commonwealth, not a state, and has historically been ignored by the political system.
Here’s what I know. The bond markets for Puerto Rico have historically been attractive to investors because the bonds are “triple exempt,” which basically means no taxes are applicable to them. This made it too easy for Puerto Rico to borrow money and has put it in a hole, very analogous to the Greek situation. And now we have to decide how much the people should suffer for the results of the bond markets.
Yesterday I reblogged a post by Marc Joffe, who argued that the U.S. should extend Chapter 9 to Puerto Rico. Hypothetically this would allow Puerto Rico to declare bankruptcy and restructure its debts in some reasonable way. However, as Kristi Culpepper explained in this Medium piece (hat tip Tom Adams), it actually wouldn’t give Puerto Rico the relief that it needs, first of all because it would redefine Puerto Rico as a “state” but states are not eligible to declare bankruptcy, and secondly because the corporate bonds issued by Puerto Rico’s public corporations have a special status that also prevents them from restructuring.
Culpepper also notes in her piece that people who cry foul at the concept of restructuring debt after it has been issued can rest assured that there is precedent for it. Personally, I don’t even understand that complaint; surely everyone realizes that any debt might go into default, and it hardly matters exactly what that procedure looks like.
Culpepper recommends something else entirely, namely a federal financial control board. The idea is that there’s also precedent for this, in the 1990’s in Washington D.C.. However, it would essentially mean handing over control over its finances to the board. Culpepper notes that this could even happen without consent. I think the Puerto Rican people may have something to say about this. She also suggests we could provide liquidity for Puerto Rico if we wanted, although it might look something like a bailout.
The biggest problem is that, even now, no politician seems to really care about Puerto Rico, except to fight against it becoming a state.