A solution for Puerto Rico
It took several years for the crisis that has Puerto Rico on the brink of bankruptcy to develop. However, federal officials and investors have ignored ongoing signs of an economy that is in serious trouble. Now the solution requires extraordinary efforts and sacrifices in order to prevent a default, which would cause significant losses for U.S. investors. It’s time to provide help instead of continuing to damage an economy that is restricted by archaic laws.
Because of the special relationship that Puerto Rico has with the U.S., the island was able to issue tax-free bonds that attracted many U.S. investors. The economy has deteriorated since 2004, while the real estate crisis has been worse than in the mainland. Therefore, the value of the bonds fell and some ended up in the hands of mutual funds that buy problematic debt at low prices. The crisis deepened and the money was spent to pay the debt instead of making productive investments. Emigration grew, leaving Puerto Rico with fewer people and higher per capita debt, low workforce participation and a poor environment for starting businesses.
The oppressive outlook of an unpayable debt and creditors that demand tax increases and cuts in social safety net spending in order to receive money that pays only the interest, raising the total debt, is a familiar one. This formula leads to a recession that doesn’t solve the problems of the people or the drowning economy.
One of Puerto Rico’s problems is that it is forbidden from filing for bankruptcy under Chapter 9, like the City of Detroit did, which would protect it from creditors during restructuring. The island’s Constitution requires it to pay these financial debts first before meeting its internal obligations, like for example, making pension payments. Puerto Rico also suffers because of obsolete cabotage laws that multiply its transportation and energy costs.
Governor Alejandro García Padilla is doing the right thing, recognizing that the debt is unpayable and refusing to accept suffering for his people, which in the long run won’t solve the problem. There needs to be a renegotiation with mutual funds, like it happened in Argentina and Peru. But negotiations are also necessary with Congress and the federal government to support much-needed tax and productive reforms.
Congress must let Puerto Rico solve its problems by changing harmful laws that strangle its competitiveness and resources. That is the way to prevent hurting investors and to open up a path to emerge from the crisis.
