Puerto Rico’s government is on the verge of running out of money. A messy default is in nobody’s interest, which is why Congress ought to move swiftly to provide the American territory with a way to restructure its huge debt and revive its economy.
The Obama administration last week offered the outline of a rescue plan to help the island and the 3.5 million American citizens who live there. The plan would impose new oversight on the island’s finances and expand access to government programs like Medicaid and the earned-income tax credit. Crucially, it asks Congress to change the law so that Puerto Rico’s territorial government and its municipalities can seek bankruptcy protection.
Political leaders in Puerto Rico and many financial and legal experts have been saying for months that the territory cannot repay the approximately $72 billion it owes to hedge funds, mutual funds and other investors. Its economy is not growing, and tens of thousands of residents are leaving every year for the mainland to look for work. More than 300,000 have left in the last 10 years.
The Obama administration last week offered the outline of a rescue plan to help the island and the 3.5 million American citizens who live there. The plan would impose new oversight on the island’s finances and expand access to government programs like Medicaid and the earned-income tax credit. Crucially, it asks Congress to change the law so that Puerto Rico’s territorial government and its municipalities can seek bankruptcy protection.
Political leaders in Puerto Rico and many financial and legal experts have been saying for months that the territory cannot repay the approximately $72 billion it owes to hedge funds, mutual funds and other investors. Its economy is not growing, and tens of thousands of residents are leaving every year for the mainland to look for work. More than 300,000 have left in the last 10 years.
Its public pension plans need a cash infusion of about $44 billion. Puerto Rico has cut spending and raised taxes in the hope of saving itself, but that hasn’t worked, and it won’t work in the foreseeable future given the sorry state of the island’s economy.
Bankruptcy seems inevitable. But under federal law, Puerto Rico’s government, its municipalities and its government-owned utilities cannot go to bankruptcy court — hence the administration’s request for a new bankruptcy process for territorial governments and a change in the law to allow Puerto Rican cities and public utilities to seek Chapter 9 protection, much as local governments like Detroit and Orange County, Calif., have done.
Many investors who have lent money to Puerto Rico and stand to lose under any debt restructuring are bitterly opposed to the Obama plan. They say Puerto Rico can repay all of its debt if it tightens its belt and privatizes utilities and other government-owned businesses. Changing the law now, they argue, is deeply unfair. But the record of what has happened in troubled countries like Greece is clear: Austerity policies have only worsened the crisis. As for the fairness argument, legislators change laws all the time to meet new circumstances.
What investors must realize is that an orderly restructuring is a far better alternative than the long and complex legal battles that would inevitably follow a sudden default. American bankruptcy courts have a good track record of resolving complicated debt cases. And if, in addition to reworking the bankruptcy law, Congress also created an oversight board, as the Obama administration recommends, investors could have some confidence that Puerto Rico’s politicians would make needed policy changes.
There is no doubt that Puerto Rican leaders have mismanaged the island’s finances and economy. What’s at issue now, though, is not Puerto Rico’s past but its future and that of its inhabitants. If Congress doesn’t like the administration’s ideas, it needs to come up with its own.
