The Puerto Rico Bailout Blunder
The Puerto Rican government offers no apologies for the debt it has amassed — $72 billion or roughly 70 percent of its gross product. The Commonwealth has already defaulted on three small debt payments and, with a massive $2 billion payment looming on July 1st, its financial problems are far from over.
At the White House’s prodding, the U.S. House of Representatives recently introduced the second version of its “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA), which would allow Puerto Rico to restructure its debt in much the same way as bankrupt companies. The legislation, which underwent a superficial rewrite following its original introduction in April, is unique considering that states are not allowed to file for Chapter 9 bankruptcy and that Puerto’s Rico own constitution requires it to meet its debts obligations.
In effect, PROMESA’s vague language allows a powerful and unelected “oversight board” to decide who it wants to protect. For example, the board has the option of bailing out fund-depleted government pension systems ahead of bondholders, who have a constitutionally-mandated priority over all other government expenses. Many of these bondholders are retirees who have put their life savings into bonds and mutual funds. They could find themselves in financial straits, if PROMESA is signed into law.
Before considering whether to open the pockets of taxpayers and bondholders to bail Puerto Rico out, Congress should consider Puerto Rico’s role in orchestrating its own financial debacle.
What we are seeing now with Puerto Rico has been brewing for years. The current financial crisis was not the result of massive hurricanes or other disasters beyond the government’s control. The cause, rather, was profligate spending and public corruption — possibly even within the current government administration — coupled with an implicit assumption that the mainland would one day bail out such fiscal irresponsibly. Even worse, those in the Puerto Rican government responsible for kicking the deficit “can” down the road were fully aware that the Commonwealth’s constitution prohibits it from defaulting on its debt.
For more than a decade, Puerto Rico covered its spending by borrowing money and issuing bonds, and it did so while pledging its “full faith and credit” — an unconditional commitment to pay interest and principal on debt. As the government has increased taxes, raised its level of debt, and lost government subsidies, its business and consumer base has eroded, leaving behind a 45 percent poverty rate and 12 percent unemployment rate.
If ever we needed an example of how ineffective big tax and spend policies are, here we have it. Instead of choosing fiscal responsibility, the Puerto Rican government chose to spend money it did not have. With rising debt evident in a number of states and municipalities in this country, making an exception for Puerto Rico would set a costly precedent for taxpayers as well as a disincentive for fiscal restraint for years to come.
Puerto Rico politicians are not innocent bystanders. Even today, the governor of the Commonwealth remains insistent on politically expedient (rather than strategically-wise) spending. The current debacle, which has been a decade in the making, was not unforeseen. We should not reward corruption and waste.
If Puerto Rico is granted the power to alter the terms of its debts retrospectively — whether that power is wielded by the government itself or by the “oversight board” — few, if any, lenders will line up to buy future pigs in a poke. And interest rates on bonds will soar, making repayment even more unlikely. Without bonds, it would be nearly impossible to finance the building of roads, bridges, and schools. Congressional politicians shouldn’t provide the means for state and local politicians to sidestep lawsuits and to decide who gets paid back and who doesn’t. This would only push costs to innocent parties and increase the likelihood of future financial bailouts.
Politics fueled Puerto Rico’s spending spree. If Congress approves PROMESA, Puerto Rico would be allowed to circumvent legal protections designed to shield consumers from such political shenanigans. But the Commonwealth is not without a solution to the problem, even without rich Uncle Sam. The Puerto Rican government should rein in spending and begin paying what debts it can. Congress, meanwhile, should drop the idea of bailing out fiscally reckless governments.
Bailing out Puerto Rico would not only reward fiscal irresponsibility, it would fail to correct the reckless spending behavior that led to the problem in the first place. Let’s stop throwing good money at bad ideas and start putting the blame where it belongs. Politicians should face the consequences of their actions.