In recent days, both my NR colleague Kevin Williamson and my AEI colleague Ben Zycher have come out against extending bankruptcy protections to Puerto Rico. They raise good points. But I disagree with their conclusion, because I think that in the absence of those protections, we could well see a taxpayer bailout of the island, which would be worse. It’s a possibility neither of their arguments mentions. Williamson says that “some in Washington” want to pretend that Puerto Rico is a municipality and let it go into Chapter 9, and he especially criticizes the Republicans within that “some.” What more in Washington, especially Republicans, are saying is that municipalities and other subdivisions of Puerto Rico should be allowed to go bankrupt, as municipalities and subdivisions of states can. Congress has forbidden this option for Puerto Rico for reasons lost to history. To Williamson, allowing it would be a “bailout.” But it wouldn’t be a normal bailout, in which taxpayers rescue the creditors of insolvent institutions. The creditors would have to write down the value of their loans and taxpayers would be protected. Oddly, Williamson gets the endgame right: “Puerto Rico should be allowed to default on its debt payments, leaving creditors — who knew the risks when they were chasing those high returns — to work out what they can.” Yes: Doing that in a structured way is basically the purpose of bankruptcy.
Zycher, meanwhile, presents three arguments against applying the bankruptcy laws that cover the rest of the U.S. to Puerto Rico. First, he says it would raise the island’s future borrowing costs. That’s true. But the availability of bankruptcy to debtors raises borrowing costs everywhere else in the U.S. already; the change would just put Puerto Rican borrowers and their creditors on a more level playing field with everyone else. Also, raising future borrowing costs seems like a price worth paying given that a) it would reduce the possibility of a federal taxpayer bailout, and b) the borrowers in question have not shown such a sterling track record of responsibility that we should be extremely upset that they will not be able to borrow on such liberal terms in the future. Second, Zycher says that it would be unfair to change the rules retroactively. The debts were incurred on the understanding that bankruptcy was not possible. Here, too, he has a good point. Applying new bankruptcy laws to old debt is not optimal (even if there is ample historical precedent for it). But we are in a pretty suboptimal situation, and it still seems better for the creditors to take a hit for unwise lending than for taxpayers to do so.
Third, Zycher thinks this retroactive change would raise borrowing costs for municipalities across the nation. He writes: If the commonwealth’s commitments can be repudiated after the fact, why not erode other debts incurred by other borrowers in the municipal bond market? If enacted, S. 1774 promises to increase borrowing costs for all municipal debt across the country, an outcome that would serve the interests of no one except borrowers with political incentives to acquire debts that cannot be sustained. Other borrowers in the municipal bond market can already lose money when borrowers file for bankruptcy. And that higher borrowing costs are good for reckless borrowers is counterintuitive. EDITORIAL: What to Do About Puerto Rico Both Williamson and Zycher recommend that Congress and Puerto Rico take other steps to improve the island’s economy and fisc. All of the ideas they suggest strike me as good ideas — ideas that should be packaged with bankruptcy protections, perhaps in the form of a fiscal control board. But those ideas, like a lower minimum wage for the island, won’t do much to take a taxpayer bailout off the table. Addressing the anomaly in the law regarding bankruptcy in Puerto Rico would. — Ramesh Ponnuru is a senior editor of National Review.
by Ramesh Ponnuru
Puerto Rico Bankruptcy -- No Bailout
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