MIRED IN a debt crisis whose severity is matched only by its mind-numbing complexity, Puerto Rico is almost out of options. The island’s government has been meeting its obligations through such expedients as selective defaults on low-priority debt, deferring payments to suppliers and stalling refunds to taxpayers. And still it is likely to have no cash left when a major bond payment comes due on June 30.
The question is not whether to restructure Puerto Rico’s $70 billion-plus debt and restart economic growth; it is how to do so. That will take swift action from the U.S. Congress, which holds great power over this Caribbean territory and the 3.5 million U.S. citizens who still — despite a growing exodus of job-seekers to the mainland — call it home.
Fortunately, President Obama and House Speaker Paul D. Ryan (R-Wis.) have agreed to make Puerto Rico a priority for 2016, with the latter having set March 31 as a deadline for a bill to reach the House floor. Though the legislative details are in flux, there is high-level consensus that Puerto Rico should be enabled to reduce its debt load and stretch out payments, through a bankruptcy-like process, while committing to an overhaul of its insolvent governmental institutions — so as to reduce the long-term hit to creditors and, as important if not more so, to restore the island economy’s capacity to grow and create opportunity.
How best to ensure that Puerto Rico does, indeed, reform permanently is likely to be one of the most controversial issues in the coming weeks. It’s a familiar point of contention to Washingtonians, who lived through our own congressional intervention in the fiscal crisis of the early 1990s. To make the D.C. rescue work, Congress imposed a financial control board on the city, notwithstanding the local population’s historically rooted concerns about home rule — concerns that are, if anything, more pronounced in Puerto Rico. Any financial supervisory authority will lack legitimacy, and may therefore fail, unless it fully respects Puerto Rican sovereignty.
Still, we see no alternative to a robust supervisory authority as part of the ultimate Puerto Rico solution. As D.C.’s experience proves, such an authority is necessary not only financially but politically, because Congress — especially a Republican Congress — will not help without plausible, institutional guarantees that any rescue is a one-time occurrence. The trick will be to design a board whose powers and mandate are not open-ended but hinge on Puerto Rico’s performance in carrying out reforms. The law creating the District’s financial control board, for example, conditioned the restoration of the city government’s autonomy on four consecutive balanced budgets. Puerto Rico is in a very deep hole; this city’s experience shows that, with smart policy help from Congress and sustained effort, there is hope to get out.