Advocates of Puerto Rico Bill Say the Choice Is Between Orderly Restructure and Chaotic Collapse

The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) is a bill in the U.S. House of Representatives that would, very broadly speaking, allow Puerto Rico to cancel nearly half of its $72 billion debt, in exchange for surrendering much control over its fiscal affairs to an independent financial control board.

“This package of reforms will restore the guardrails of freedom and self-governance in Puerto Rico,” said Rep. Rob Bishop (R-UT), chairman of the House Committee on Natural Resources, which put the bill together.  “It will hold Puerto Rico accountable to its debt, uncover audited financial statements, enforce fiscal responsibility and cut red tape holding down the Island’s economy. It provides tools to redirect Puerto Rico from a path of destitution towards a path of prosperity, preserving freedom and opportunity for the next generation.”

“The three and a half million Americans living in the U.S. territory deserve the attention and support of Congress. After decades of mismanagement, Puerto Rico’s investors also deserve better,” said Rep. Sean Duffy (R-WI), sponsor of the bill.  “A protracted and chaotic legal battle would not serve the interest of creditors or the island. Worse would be a multi-billion dollar taxpayer bailout thrust on the shoulders of America’s taxpayers and retirees.”

Duffy added that “if we do nothing, the American people will be on the hook,” which sums up one of the major arguments of the bill’s proponents, in both Washington and Puerto Rico.  

Legislation signed last week by Puerto Rico Governor Alejandro Garcia Padilla placed a moratorium on the island’s debt repayments—a move described as beginning the countdown to a doomsday default in May.  

As the Wall Street Journal put it, “Puerto Rico is playing brinkmanship with creditors by threatening a default that could reverberate through financial markets and the refugee state of Florida.”  In fact, the Journal speculated that Padilla was trying to sabotage deliberations in the U.S. Congress by triggering a debt crisis.

Supporters of PROMESA argue that it would disarm this debt bomb, making it possible to arrange more reasonable and equitable settlements with creditors then they can expect from a chaotic process that begins with a $2.5 billion default on loan payments over the summer.  The installation of the oversight board is meant to forestall the weaponization of debt that led to so much bitterness and confusion in places like Greece.  It would also prevent coercive measures like Puerto Rico’s ill-fated alternative minimum tax hike on property transfers, which amounted in practice to a tariff shakedown of Wal-Mart.

PROMESA’s advocates are very insistent that it doesn’t amount to a “bailout” of Puerto Rico.  Critics say they’re playing word games by narrowing the definition of “bailout” to exclusively describe direct U.S. taxpayer subsidies, but the implied message from PROMESA might be restated as, “pass this bill or there will be old-school bailouts.”

In fact, that argument is explicitly made in a fact sheet circulated by the office of House Speaker Paul Ryan (R-WI).  “If Congress fails to act and Puerto Rico fails to make debt payments in the coming months, large-scale defaults will occur,” the bulletin warns.  “This legislation would avoid this nightmare scenario, which would be disastrous for Puerto Rico, the American bond market, and American taxpayers.”

Ryan’s office goes on to say that “big-money interest groups on Wall Street” are bankrolling opposition to PROMESA, because they want to force a U.S. taxpayer bailout of their “bad loans,” rather than accepting the proposed “haircut” and losing up to half of the loan value.

To put it bluntly, previous efforts to wheedle Puerto Rican government into fiscal responsibility have failed.  PROMESA advocates don’t want to put it quite this bluntly, but swapping $32 billion in debt relief for a fiscal oversight board might present the best opportunity in a generation to impose discipline on the island’s government.  (As long as we’re speaking bluntly, let’s acknowledge it’s the kind of discipline nobody has been able to impose on Washington, D.C.)

One major lingering question about the oversight board is how much control it can exercise over Puerto Rico’s $46 billion pension liability —the largest debt the island carries, and a fiscal H-bomb poised to detonate in just a few years.  

The Wall Street Journal charges Puerto Rico with “shortchanging its pensions while buying the votes of its Brahmin public-employee class,” loading up the insolvent system with new benefits and bonuses, and even allowing public employees to use the pension system as a kind of credit bank for mortgages and personal loans.  That’s on top of welfare benefits from over two dozen public agencies.

Every penny of that spending has devoted beneficiaries who will fight to protect it, making conventional political reform nearly impossible.  It’s unclear just how much the Oversight Board can do about pensions, but proponents argue that it has a chance to make those politically unthinkable spending cuts… while, under the alternative default scenarios, there is no real chance at all.

To the argument that Puerto Rico’s citizens should be left to deal with the fallout from their government’s irresponsible actions, deal with the consequences of default, and build a better polity from the ruins, there is a response which advocates of the PROMESA solution don’t like putting into so many words: that’s not what Puerto Ricans will do.  If the island falls into chaos, government services break down, and the economy craters, they’ll move to the continental United States instead.  Those who remain behind will be consigned to brutally hard times, with little hope of attracting the investment capital needed to turn the economy around.

Americans for Tax Reform endorsed the House bill on Thursday, noting that “with a debt-to-GDP ratio of 70 percent, Puerto Rico is $72 billion in debt and has no realistic way to pay it back.”  Among other difficulties, ATR notes that 10 percent of the population departed the island over the past decade, as the economy foundered.

ATR says PROMESA will facilitate “a process where restructuring is voluntary between debtors and creditors,” with the Oversight Board stepping in to “evaluate and resolve on a case-by-case basis” when necessary agreements cannot be reached voluntarily.  Considering the magnitude of the debt cramdown necessary to make Puerto Rico’s finances sustainable, proponents of the bill believe no other approach will encourage enough voluntary cooperation to build a comprehensive solution — with, it must be said, some unwilling creditors inevitably dragged into the framework after majority agreement is reached.  

Alternative approaches strike PROMESA backers as more akin to fiscal warfare than coordinated effort, and the stress of such a conflict would be too much for the island’s fragile economy to bear.  ATR notes that the House bill includes some “pro-growth reforms” in addition to the Oversight Board — reforms such as adjustments to minimum-wage laws and other labor rules that seem unattainable through conventional Puerto Rican politics.

There is a point on Speaker Ryan’s fact sheet which argues that PROMESA will “hold the right people accountable,” because “both Puerto Rico and Wall Street will have to make amends for their involvement with this mess.”  Actually, imposing the Oversight Board and other reforms will relieve Puerto Rico’s government of both power and responsibility.  As for Wall Street, the Speaker charges that it contributed to the crisis by “giving the government loans that clearly it couldn’t pay back.”

That’s the heart of the matter: there is no way to repay the loans.  The same argument is being raised by bankrupt socialist governments around the world, and by continental American states teetering on the edge of fiscal collapse.  In the not-too-distant future, that anguished wail of government failure will be raised by Washington itself.  

There are no good options when, as Margaret Thatcher put it, the socialists run out of other people’s money to spend.  The only good move is to prevent the crisis from accumulating, by refusing to loan spendthrift governments the money they crave, as Speaker Ryan’s office suggests Puerto Rico’s creditors should have done.  Perhaps the federal government will learn a few lessons from the reforms imposed upon Puerto Rico.


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