Bailing out Puerto Rico’s bondholders

The Puerto Rico Assistance Act (S. 2381) was just introduced by Sens. Orrin Hatch (R-Utah), Chuck Grassley (R-Iowa) and Lisa Murkowski (R-Alaska). It includes austerity for Puerto Rico, U.S. taxpayer funds to support the island and a (too?) powerful fiscal control board for the territory (colony?) of Puerto Rico. Notably absent is either a contribution on the part of bondholders or a legal framework to restructure Puerto Rico’s debt.

{mosads}Congress has been reluctant to change bankruptcy rules for Puerto Rico debt. It did not show the same reluctance in 2005, when legislation steered by Grassley modified bankruptcy law for existing debt throughout the United States. In fact, the GOP has a long and illustrious history of changing business rules.

The Sherman Act of 1890 did not grandfather existing monopolies built when there was no monopoly law, but rather sent these companies to the slaughterhouse to be broken up. The most momentous change in business rules in the history of the nation was the 13th Amendment that turned business assets into free men and women, with zero compensation for the slaveowners who invested in slaves while slavery was legal.

Puerto Rico bondholders are no slaveowners. They are partners in the enterprise of Puerto Rican economic development. As the enterprise went sour, the burden for the setback must be spread among stakeholders. Thus, debt restructuring must be part and parcel of any Puerto Rico assistance package by the federal government. A judge should allocate the burden fairly among the different stakeholders.

The Puerto Rico Assistance Act would use U.S. taxpayers’ money to shore up the fiscal condition of Puerto Rico so that bondholders could be paid. However, it would not provide an avenue for debt restructuring that would cost nothing to U.S. taxpayers. It would also fall short of putting Puerto Rico on a sustainable path.

The fiscal control board for Detroit steered the jurisdiction through bankruptcy. One year after leaving bankruptcy, Detroit shows improvement. Richard Ravitch, a key player in the New York City crisis of the 1970s, stated lDec. 1 during congressional hearings on Puerto Rico that the threat of bankruptcy allowed New York City to win concessions from its creditors and that such concessions helped to manage the crisis. Alex Pollock of the American Enterprise Institute stated in the same congressional hearings that a fiscal control board for Puerto Rico should quickly report to Congress on the need for a bankruptcy legal framework.

The present Puerto Rico debt burden is not sustainable. A proper legal bankruptcy framework is a cornerstone of any well-functioning capitalist economy. We are way past the times of Wilkins Micawber in Charles Dicken’s “David Copperfield,” in which bankruptcy meant prison. But if not implemented, emigration from Puerto Rico will continue, making the debt burden ever more unsustainable.

Feliciano is president of Advantage Business Consulting.