Helping Puerto Rico Prosper

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The editors of Bloomberg View write, “The sunsets, the sand, the lingering debt crisis.” This article focuses on Puerto Rico’s debt crisis and the House Judiciary Committee bill to allow the island’s public-sector corporations to declare bankruptcy. See full article in the link below:

In an ideal world, Puerto Rico would be bankrupt. Instead, it is sliding toward something far more dangerous and uncertain — and President Barack Obama and Congress need to intervene.

On Thursday, the House Judiciary Committee is taking up a long-shot bill to allow the island’s public-sector corporations to declare bankruptcy. Providing these protections isn’t any kind of a bailout. It will just help Puerto Rico’s government begin to ease a debt-servicing burden that consumes 16 percent of its budget. It will also ensure that not just the biggest or loudest creditors get paid.

This crisis has been a long time brewing. Since 2006, Puerto Rico’s economy has contracted every year but one. Its unemployment rate of 13.7 percent is double that of the U.S. mainland; its poverty rate is twice that of Mississippi. Meanwhile, Puerto Rico’s population and tax base have aged and shrunk. Since 2000, public debt has risen from 60 percent of gross domestic product to more than 100 percent. Much of that has been racked up by the island’s inefficient public-sector corporations.

Earlier this month, however, a U.S. federal court struck down a Puerto Rican law that would let its ailing power, water and highway authorities restructure their debts. Then Standard & Poor’s downgraded the commonwealth’s debt deeper into junk status. Both actions will make it more expensive for Puerto Rico to keep selling bonds to finance its $73 billion in public borrowing — well over double the $29 billion owed by New York, the most indebted U.S. state, which has five times Puerto Rico’s population. Moody’s Investor Service now puts a high probability on a Puerto Rican default in the next two years.

The tax-free status of Puerto Rico’s securities has long appealed to investors in municipal bond funds. Offering progressively higher yields, the government has used bonds to bridge budget deficits and to keep the lights on and the water flowing. Now, in a form of tax peonage, it’s securing high-yield bond sales to hedge funds and buyers of distressed debt with the promise of dedicated future revenues from new taxes.

As neither a U.S. state nor a nation, Puerto Rico is “one of the few places in the world where finances are not regularly surveyed by a public agency,” the New York Federal Reserve Bank observed last year. Yet being a commonwealth is no inoculation from Stein’s Law: “If something cannot go on forever, it will stop.” Shrinking Puerto Rico’s debt will require running a budget surplus for years and an economy that grows at a nominal rate consistently higher than the interest rate on Puerto Rico’s debt. Neither is likely. [. . .]

[Photo above by Al Bello/Getty Images.]

For full article, see http://www.bloombergview.com/articles/2015-02-25/let-puerto-rico-go-bankrupt

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