THE BIG story in the Caribbean these days is Cuba, where the Obama administration’s easing of U.S. economic sanctions has investors buzzing about the prospects for making money, someday, in a possible revival of that economic basket case. How ironic that far less attention is being lavished on a neighboring island that also is in deep financial distress and needs U.S. help, yet, unlike Cuba, is a long-standing friend of the United States — indeed, an integral part of it.
We refer to Puerto Rico, which is laboring under a $72.6 billion debt burden, sluggish growth and a recent downgrading of its credit ratings to junk level. There is broad consensus in financial circles that the island could descend into even worse fiscal chaos and poverty unless it gets relief soon.
Last June, Puerto Rico adopted a law that would have permitted government entities, such as the nearly insolvent electric utility, to restructure about $24 billion in debt — over the objections of holdout creditors — or to go through a bankruptcy-like process akin to those adopted in Detroit and other U.S. cities. The measure would have greatly enhanced the island’s negotiating power with creditors, who include U.S. individuals and institutions drawn to Puerto Rican bonds by their tax-free interest. But on Feb. 6, a federal judge in San Juan struck down the law , ruling, in effect, that only Congress, not the island’s legislature, could authorize Puerto Rican quasi-governmental entities to enter bankruptcy.
Now Puerto Rican leaders are asking Congress to enact a new remedy, the need for which stems from the island’s anomalous political status: neither fully sovereign, and therefore capable of enacting its own bankruptcy law, nor a state, in which case it would be covered by existing law that lets municipalities and other subdivisions of states file for bankruptcy. The legislation, proposed by Pedro Pierluisi (D), Puerto Rico’s nonvoting representative on Capitol Hill, would treat Puerto Rico like the states, allowing its entities and muncipalities to declare bankruptcy; it was discussed Thursday at a hearing before a House judiciary subcomittee .
There are two main objections to the bill: that it amounts to changing the rules under which investors agreed to buy Puerto Rico’s debt and that the island could scrape together the cash to pay its creditors if it were to reform the entities in question, especially the notoriously inefficient electric utility, which is owed hundreds of millions of dollars by the island government. Both points are valid, to an extent — just as it’s valid to point out that investors in Puerto Rican debt heretofore enjoyed an especially sweet deal because it paid tax-free interest.
Puerto Rico must indeed reform its public sector, but the structural crisis affecting its economy is such that even dramatic new efficiencies probably wouldn’t produce enough growth to pay its debts as currently structured. For the sake of its economic future, the United States’ best friend in the Caribbean needs the power to negotiate a new, more sustainable deal with its creditors, and Congress should grant it.