Stanford, Calif. — Last week, Puerto Rico eked out a major round of payments on its enormous debt — surely the last one that the island can afford to pay in full. The territory’s debt crisis reached a boiling point last summer and is beginning to overflow. By the new year, Puerto Rico will most likely be unable to meet payroll for basic services on the island.
So far, Congress has languished in paralysis, failing to act on legislation to let the territory file for bankruptcy and restructure its payment schedule. That leaves the Obama administration, again, to compensate for congressional inaction with a creative solution. The Treasury Department can and should do so — immediately.
It is inconceivable that Puerto Rico can keep paying its debts on schedule. Indeed, it might be irresponsible to do so. The territory is 10 years into a recession, with unemployment and its under-the-counter economy growing. Manufacturing businesses, long a key sector of its economy, have moved production abroad, as they have in Detroit and other postindustrial cities. That has meant mass layoffs and rising blight, and has left the work force few options on the island other than poverty wages in a service economy.
With the economy shrinking, so has the government. Puerto Rico’s austerity policies have included tax and energy rate hikes, school closings, pension cuts and privatization of its airport. The government has laid off 21 percent of its employees since 2008.
If service cuts and asset sales remain the only response to the crisis, the economy is sure to worsen. Such measures will undermine Puerto Rico’s ability to recover and pay its debts over the long run, leaving it like a debtor who sells his car to make a few more payments to a creditor but then can’t reach his job.
That vicious cycle is underway already. Job seekers, young people and key workers (especially teachers, doctors and nurses) have been migrating north in large numbers, leaving behind a population older and poorer that has shrunk by more than 1 percent per year since 2006.
Without action from Washington, Puerto Rico lacks the authority to declare bankruptcy. Meanwhile, the fiscal free-fall leaves everyone progressively worse off — residents, creditors and America’s municipal bond markets. While a time for critiquing Puerto Rico’s past fiscal policies will come, such a critique cannot be allowed to substitute for action by the Congress or the Treasury now.
A restructuring process for Puerto Rico’s debts is the only chance to stabilize its economy. The primary goal would not be to forgive debt, but to establish a feasible plan for debt payment that could bend the curve of available government revenues upward again. That would facilitate not just the island’s economic recovery, but also the highest repayment to creditors over time.
Formal bankruptcy through a mechanism known as Chapter 9 is normally the best tool we have for a public agency’s debt restructuring. It is designed to spare debtors and creditors a chaotic and expensive “race to the courthouse,” in which creditors separately sue to claim assets and collect what they can in the short term. Instead, the agency’s creditors are ordered to a single negotiating table to seek a fair plan for repayment. That would be critical for Puerto Rico, which faces a large number of creditors set to disagree over who should get paid first.
In Puerto Rico’s case, only Congress can offer the solution of access to bankruptcy for the territory as a whole. Last week, the United States Supreme Court accepted a case that will determine whether the territory can authorize its municipalities and public utilities to seek bankruptcy restructuring. But even that case cannot accomplish what Congress can: allow the territorial government to restructure its own debt under something like Chapter 9, a process that is not available to states.
If Congress continues to fail at a bankruptcy solution, the Treasury Department can — and must — pursue a second-best process modeled after Chapter 9 itself. While Treasury would be working more with the power of persuasion (like a big bank) than the power of legal coercion (like a court), that could still be enough influence with which to broker a solution.
Treasury is capable of drawing creditors to the negotiating table. Its tools of persuasion could include the questionable legality of some of the debt, the self-interest of most creditors and the threat that Congress will eventually mandate bankruptcy. Treasury officials could take lessons from the leadership of federal, state and local officials who avoided or led bankruptcies in New York City in 1975; Harrisburg, Pa., in 2013; and the Big Three automakers in 2009.
With a population larger than that of 22 states, Puerto Rico is “too big to fail.” But it has a fundamental problem in moving Washington to action: It lacks the clout there that comes with a voting voice in presidential elections or Congress. If Puerto Rico defaults next year, it will be because Washington has shirked its responsibility for the well-being of eight million American citizens who either live on the island or have strong ties to it. Washington will also be understood to be favoring the few hedge funds that own more than one-third of Puerto Rico’s debt. Because they have the wherewithal for endless litigation, they are the only potential winners under the status quo.
The biggest losers are already the 3.5 million American citizens who live on the island. But their political handicaps in federal politics do not leave them entirely powerless to demand bold leadership from Treasury.
That is because a new voter in federal elections is born every time a Puerto Rican uses the power of her American citizenship to migrate north for work. The United States mainland is now home to 5.1 million Puerto Ricans, most of whom are of voting age. They include at least 850,000 living in Florida, a swing state.
Each of those voters on the mainland should watch closely this winter, demand leadership to help Puerto Rico, and judge our federal politicians by their actions on this crisis. On Nov. 8, 2016, they should be organized and ready to throw their weight around.
Let the U.S. Treasury Rescue Puerto Rico
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