Can Puerto Rico Pay its Debts or Is Default in the Future?
Q.
A U.S. federal judge last month struck down Puerto Rico's Recovery Act, a law passed last year to allow the island to overhaul the debts and labor contracts of struggling public corporations, and the U.S. House of Representatives recently held a hearing on a bill that would allow Puerto Rico's public agencies to reorganize under Chapter 9 of the U.S. Bankruptcy Code as the commonwealth struggles with a high debt load and weak economy. How will Puerto Rico's debt woes play out? Will the island be able to pay its debts or is a default in its future? What steps need to be taken to set the U.S. territory on sounder financial footing?
A.
Rafael Cox Alomar, assistant professor of law at the David A. Clarke School of Law at the University of the District of Columbia: "Negative growth, together with uncontrolled deficit financing, has led Puerto Rico to unmanageable levels of public debt. According to the commonwealth's Government Development Bank, the total outstanding debt of the island's government was $72.6 billion, or 103 percent of GNP for fiscal year 2014. Contrary to what the U.S. territory's government represents to the world, Puerto Rico is at the verge of defaulting on its debt. This will no doubt have a ripple effect on the stability of the United States' $4.3 trillion municipal bond market, since close to 75 percent of municipal bond funds in the mainland own the island's bonds. Solving the Puerto Rican crisis requires more than palliatives. Cutting down to size Puerto Rico's domestic governmental structures, treating it as a state for purposes of Chapter 9 of the Bankruptcy Code and restructuring the existing public debt are measures in the right direction albeit insufficient. At its most basic level, Puerto Rico's economic and fiscal meltdown is a consequence of its even more pervasive political meltdown. Puerto Rico's implosion has brought to bear the inadequacy of its current neocolonial relationship with Washington. The arrangement whereby Congress unilaterally controls, without the explicit consent of the people of Puerto Rico, all the economic variables affecting their lives must come to an end. Commonwealth status is a byproduct of the same failed Cuba policy the White House recently discarded as utterly flawed and anti-historical. A new Puerto Rico policy, premised on devolving sovereignty to the island, is of the essence."
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Ivonne Lozada Rosas, assistant vice president and executive director of the Public Policy Institute of the Ana G. Méndez University System: "In a colloquial/ juridical point of view, Puerto Rico is between a rock and a hard place. Given its political status, which in itself is a source of infinite controversy, it does not have access to financial alternatives that sovereign nations have nor to those provided by the federal judicial system. In this judicial dilemma and facing a $73 billion apparently unpayable debt, Puerto Rico seeks an amendment to federal bankruptcy law which has been characterized by Bloomberg News as a long-shot. In the meantime, the rating agencies have consistently downgraded Puerto Rico's credit status, which currently is in junk status. At the same time, the private sector seems to be dragged down by the government, and the government's public approval is at an alltime low. To make things worse, a much needed tax reform seems to have died in the legislative process where the executive proposal does not have much of a chance of success. An attempt to find a local bankruptcy solution was declared unconstitutional by a federal judge, while the federal government seems to be dragging its feet in finding a solution to Puerto Rico's fiscal problems. At this point, the light does not seem to be visible. Given the resilience of the Puerto Rican people, some solution will be found even if at this time it seems to be distant."
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Todd Hagerman, head of investor relations at the Government Development Bank for Puerto Rico: "The commonwealth is pushing Congress to amend Chapter 9 of the federal bankruptcy code to provide a clear mechanism to address the long-term structural problems that have plagued the commonwealth. Moreover, the lack of an amendment to Chapter 9 only serves to heighten market uncertainty, particularly surrounding the excessively leveraged public corporations. In effect, the lack of clarity only serves to further raise the commonwealth's elevated cost of capital and exacerbate the fiscal emergency in Puerto Rico, including the potential disruption of basic public services including water, power and transportation."
A.
Emilio Pantojas García, senior researcher and professor of sociology at the Center for Social Research at the University of Puerto Rico: "In October 2013, The Economist warned about Puerto Rico being the Greece of the Caribbean. 'With $70 billion of debt outstanding, the equivalent of 70 percent of its GDP, it is more indebted than any of America's 50 states … Puerto Rico is a chronically uncompetitive place locked in a currency union with a richer, more productive neighbor. The island's economy is also dominated by a vast, inefficient near- Athenian public sector.' A few months later, the major credit rating agencies downgraded the government of Puerto Rico's bonds to the 'non-investment' category in order to discourage the practice of borrowing to service debt. The Puerto Rican economy has been contracting since 2006, while debt has increased. Successive governments of both principal parties have failed to develop effective economic policies and government and tax reforms to stabilize the economy and restore growth. The island faces default on various components of its public debt. Unlike the 50 states, the commonwealth's government cannot declare bankruptcy. In order to circumvent that restriction and 'ease' into default while not scaring all lenders, the commonwealth passed the Puerto Rico Recovery Act to allow its public corporations to declare bankruptcy and reorganize. As the law was struck down in federal court, the commonwealth's government is now asking Congress to allow its public corporations to reorganize under Chapter 9 of the U.S. Bankruptcy Code. Even if Congress were to grant Chapter 9 protection to Puerto Rican public corporations, the problem remains. The Puerto Rican fiscal crisis is rooted in bad governance: public corruption, weak institutions, lack of transparency, no accountability and impunity characterize the government style of the bipartisan kakistocracy in power. In order to deal with the crisis, Congress should create a non-partisan task force integrated by mainland and local experts to study and investigate the wasteful and inefficient economic and administrative government practices and recommend a strategy for recovery. Anything else will be a stopgap measure."
