Don't be Wimpy: The Puerto Rico oversight board must stand up to cronyism

A creator can never tell what his legacy is going to be. I mean, how could the guy who created "Popeye" ever know that the greatest longstanding influence of his 1930s cartoon would be a side character's catchphrase: "I'd gladly pay you Tuesday for a hamburger today."

Popeye was old when I was a kid, and the last time he was really in the public eye it was in the 1980 movie, which was a flop. But Wimpy's oh-so-transparent attempt to swindle you into a free lunch lives on like it's one of Aesop's Fables.

Swindling isn't the currency most of us use to pay for our burgers. If that were the case, as too many people stopped paying for their sandwiches, burger joints would have to charge honest diners more for each burger. And, as prices increased, fewer people would buy hamburgers. In a cartoon world that might not be bad — I mean Wimpy would eventually have to switch to spinach, I guess — but in the real world that would mean both fewer jobs and, sadly, yummy hamburgers.

Due to decades of overspending and borrowing, Puerto Rico is already halfway through the "less yummy burger" scenario. Because of their debt, Congress stepped in last year to help the island get back on a path toward fiscal solvency with the Puerto Rico Oversight, Management, and Economic Stability Act.

But almost any decision made by the PROMESA Oversight Board will have larger effects than just the situation in Puerto Rico. We know that cronies are interested in manipulating the situation more for their gain than the people of Puerto Rico. It is going to take careful actions by everyone involved to save both the Puerto Rican economy and the municipal debt market in general.

But, given a recent proposal by the Oversight Board, "careful" isn't exactly the term to describe what they are doing. They are negotiating a side deal with Puerto Rico Electric Power Authority (PREPA) creditors, proposing only a 15 percent haircut for them and a 77 percent cut for everyone else.

That is like hitting the jackpot for the holders of PREPA debt — well, at least they won't lose nearly as bad as the other debt holders. And, it doesn't serve Puerto Rico's long-term interests. Successful negotiation of permanent debt restructuring will put the island back on a path to stability and growth. Cherry-picking specific creditors for sweetheart deals is putting politics over sound economic policy, and will limit the ability of mediators to secure a broad, fair deal for both Puerto Rico and its creditors.

But, the proposal's direction also sets a horrible precedent for future municipal debt holders. For instance, with one more major bump, Illinois is likely to be in almost the same place as Puerto Rico. But, it isn't just the failing economy that has everyone's attention — according to Dr. Ike Brannon in the Weekly Standard, investors are already starting to watch Puerto Rico closely.

Another reason for the growing wariness of investors toward Illinois debt emanates from developments in Puerto Rico, which asked for and received legislation from the federal government to assist with its debt burden.

Congress isn't exactly helping, either. The chairman of the House Natural Resources Committee is helping push for this cushy deal for PREPA creditors. He sent a letter to the Oversight Board in June in support of the PREPA deal. It's hard to understand his motives, but they don't align economically with Puerto Rico's interest, nor that of the American taxpayer.

The correct approach in Puerto Rico's case is for the Oversight Board to consider the island's debt burden in totality. Weigh the agreements made when the debt was bought, weigh the most efficient path back to fiscal solvency, and most importantly weigh the fact that other states, investors, and elected officials are watching what they are doing.

Investors happily hand over "burgers" in the form of very large checks today to local governments for use for everything from much-needed infrastructure payments to things that aren't quite as responsible for payment on "Tuesday." Government-issued debt, such as municipal bonds that finance schools, are not the problem. Bonds are a responsible, conservative financial asset, ideal for financing the huge capital projects that citizens need, and a reliable source of income for investors, given a government's predictable lifespan.

So, the risk of non-payment is a part of the price in the original deal. However, if the government can come in and arbitrarily restructure the deal, debt holders will be forced to make more aggressive deals up front – they are going to be more expensive.

This will mean higher-priced debt, which just like in the example of Wimpy's swindle-based burger economy, will likely lead to greater expense for everyone. That's a problem for Puerto Rico, that will be a problem for Illinois, and that will be a problem for any number of states afterward trying to sell any amount of debt.

So, a message for the Oversight Board: Don't be Wimpy — stand up to the cronies.

Charles Sauer (@CharlesSauer) is a contributer to the Washington Examiner's Beltway Confidential blog. He is president of the Market Institute and previously worked on Capitol Hill, for a governor and for an academic think tank.

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by Charles Sauer
Don't be Wimpy: The Puerto Rico oversight board must stand up to cronyism