Congress Helped Break Puerto Rico; Now It’s Trying to Fix It

Policies create by Congress helped break Puerto Rico. Now it’s  wrangling over over how to fix it, as time seems to be running out on the US territory.

Congress has struggled to find solutions acceptable to both Republicans and Democrats. The House Natural Resources Committee released a compromise bill around midnight Wednesday, hoping to bring the various sides together. Earlier this month, the Puerto Rican Government Development Bank defaulted on a $422 million payment. A $1.9 billion debt payment looms in June. Meanwhile, as Reuters reports, the island is hurtling toward a full-blow humanitarian crisis:

Puerto Rico has already defaulted on some of its roughly $70 billion in debt while trying to cope with a 45% poverty rate among its 3.5 million US citizens. In addition, it is reeling from a Zika virus outbreak that is hurting its critical tourism industry.”

Apparently, it’s a lot easier for government to create a debt crisis than it is to fix it.

Unmanageable debt has wreaked havoc on Puerto Rico’s already teetering economy. Hospitals have shut down wards and social services have declined significantly. People who can get off the island have. Emigration has further sapped economic activity, dragging down the territory’s fragile economy even more.

The proposed congressional legislation would allow Puerto Rico to essentially declare bankruptcy. It would not expend federal funds to bail out Puerto Rico, but would allow the island’s government to pay back debtors at less than 100%. For all practical purposes, it would create a bankruptcy process for Puerto Rico, even though you won’t find the word “bankruptcy” in the bill’s language. Under the proposal, the feds would set up a seven-person oversight board. The president and congressional leader would appoint its members.

Sen. Nancy Pelosi released a statement saying, “After long bipartisan negotiations, we believe we have achieved a restructuring process that can work.”

News reports seem to indicate the measure has a decent chance of passing. But the bill won’t likely get much support from people holding on to all of that bad debt:

Language allowing Puerto Rico to cut repayments to creditors without their consent, known as a ‘cram-down,’ remains. The bill does not prioritize pensioners over bondholders, but the language remains muddied, one analyst surmised.”

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This is exactly the approach Peter Schiff has recommended. Earlier this year in an interview on CCTV America, Peter called a Puerto Rican bailout “immoral”and argued that the territory should be allowed to go bankrupt. On a recent podcast, he said the people who took the risk and bought the debt should have to pay for their mistake, not the US taxpayer:

If Puerto Rico is allowed to be restructured, they won’t need a bailout because the hedge funds will be the ones to lose. They’re trying to make it out like it’s mom and pops who are going to be the losers. No, no. It will be these wealthy hedge funds that are going to lose out. But they need to lose out, because they never should have bought these bonds.”

As Congress tries to figure out how play the role of white knight riding in to save the day, it might be a good time to point out that it played a huge role in pushing Puerto Rico to this point. As we reported recently, imposing the US minimum wage on the territory tied a giant millstone around its economy’s neck. On top of that, federal law encouraged and facilitated a Puerto Rican government spending spree. Vox summed up the root of the crisis nicely.

If you’re just tuning in, for years a quirk of US law created a tax subsidy for Puerto Rican debt that encouraged middle-class Americans to binge on loaning money to Puerto Rico without really realizing that’s what they were doing. The Puerto Rican government took advantage of this situation by borrowing a lot of money, but didn’t use the money to accomplish much that was useful in the long term.”

The bottom line is we have government trying to solve a problem government created. When you look at it from that perspective, it’s hard to muster up a lot of optimism for a long-term solution.  It’s even more frightening when you consider that even while Congress struggles to fix Puerto Rico, it continues to wander merrily along implementing the same types of policies on the mainland that got the island territory in this mess to begin with.

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