THE ORIGINS and consequences of Puerto Rico’s debt crisis are eerily similar to those of Greece’s debt crisis. In both cases, a semi-sovereign, economically uncompetitive entity finds itself mired in slow growth but enmeshed in a currency union with a far larger and stronger neighbor. Both places have been enabled to live beyond their means by years of artificially easy credit — in Puerto Rico’s case, due to U.S. laws making its bonds “triple tax-free.” But, at last, the inevitable day of reckoning has arrived, and as the best and brightest young people cross open borders in search of opportunity, poverty is deepening and policymakers are belatedly waking up to financial reality.
Can the United States manage the Puerto Rico mess any better than the European Union has managed Greece? There are multiple reasons that it can and should. The ties of history, citizenship and values that bind the United States and the commonwealth it took over from Spain in 1898, though hardly untroubled, are closer than the ties between Greece and Germany. The U.S. political process, necessarily complex though it may be, is simplicity itself compared with Europe’s. What’s more, the actual dollar cost of restructuring Puerto Rico should be far lower than that of saving Greece.
Everything depends on developing an approach that balances structural reform with an appropriate measure of debt relief. In contrast with Greece’s temporizing and defiance, Puerto Rico’s government has started mending the island’s profligate ways by admitting them, in the form of a candid, government-authorized report by former International Monetary Fund official Anne O. Krueger and colleagues. The document portrays in harrowing detail an overregulated private sector, hopelessly inefficient public services and a scandalously low 40 percent labor force participation, concluding, convincingly, that Puerto Rico must take often-painful measures to regain competitiveness.
At the same time, debt relief is appropriate because, lacking a currency of its own, Puerto Rico cannot rekindle growth through supply-side reforms alone. Prosperity depends on not only restoring work incentives but also modernizing roads, ports and the electricity system — and that will take cash. Debt relief is morally justified, as well, because U.S. policy (subsidized bonds, mainly) encouraged Puerto Rican governments of both parties to take on its now-crippling debt.
Much of that debt is owed by the electric utility and other government corporations, which would be allowed to file for bankruptcy under Chapter 9 of the U.S. code if they were entities of a U.S. state. An act of Congress allowing the Puerto Rican institutions to file for similar protection would put an impartial judge in charge of crafting an equitable debt-relief deal and go a long way toward easing the island’s predicament. Bottom-feeding hedge funds oppose such a law, which is understandable given their heavy bets on distressed Puerto Rican debt. Why so many Republicans in Congress oppose this as a “bailout” is less clear; ditto for the Obama administration’s inexplicably tepid response to the island’s mounting crisis. Irreversible structural reform in return for court-supervised debt relief is the only hope for Puerto Rico, and energized leadership in Washington is the only way to make that possible.