The Puerto Rico debt crisis is threatening to destroy the “isla del encanto,” or the “island of enchantment.”
Puerto Rico may be known for raising beauty queens, making tons of delicious rum and being the “Lechon James” of roast pork, but when it comes to the economy — let’s just say, it could do better. A lot better.
With the U.S. being a player in the current state of affairs and Puerto Rico messing up financially, should the United States bring out the bailout cauldron and save the tropical economy from spoiling even more? Well, it’s not as clear-cut of a decision as we’d like to it be.
Snowballs in Puerto Rico?
For more than a decade, Puerto Rico has been far from exemplary when it comes to financial literacy. The $37 million in bond payments that the government did not pay out at the beginning of 2016 comes as no surprise to debt holders around the world. The economic woes of the Caribbean vacation destination have been apparent since well before the financial crisis of 2008 and was only exacerbated by the resulting Great Recession.
The government has consistently overspent and has not adjusted the budget much at all. Governor Alejandro Garcia-Padilla, elected in 2012, tried to slash the budget and raise taxes, but the methods have failed. The government has instead issued bonds, or gotten themselves into more debt, as a way to muster up the cash to keep the government going.
But, those bonds are being issued with a higher premium, or surcharge, because the island has been in fiscal trouble. The higher the risk, the higher the payout. This results in a debt snowball that becomes virtually impossible to manage.
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We know that if we spend more money than we take in, and keep borrowing year after year in order to keep spending more money than we take in, we’re heading toward bankruptcy. The only thing is, Puerto Rico doesn’t have the option to file for bankruptcy, or Chapter 9, like other municipalities in the United States. Yet.
Filing for bankruptcy would allow the Puerto Rican government to halt further increasing of the debt, cut costs and get the $73 billion in debt restructured. President Obama has asked Congress to extend bankruptcy protections to Puerto Rico, because without some outside help, Puerto Rico is not getting out of this downward spiral.
Should Congress step in?
Congress has a tricky situation on its hands.
On one hand, they could step in and essentially bailout Puerto Rico by allowing bankruptcy protections. This would probably be the best tasting option as Congress could oversee a lot of the restructuring of their debt and keep them from going further into debt. In addition, creditors (the bondholders) will be able to breathe easier knowing that Congress is in charge of restructuring their debts. They probably won’t get all the money they’re owed, but they will be able to negotiate to receive a large portion of that debt.
On the other hand, Congress could let Puerto Rico handle this financial calamity on their own. This would leave it all up to the creditors and the commonwealth’s government to duke it out. This option would, of course, just plain suck for the bondholders, which we shouldn’t really give a darn about since everyone knows that Puerto Rico is a supremely risky investment. But, it will also hurt the residents of the island because even more of them would get laid off.
Ah, the double-edged sword
In a country where 900,000 people hold jobs, one third, or 300,000 of those jobs, are government jobs. To fix the problem of fiscal insolvency, the government would have to do a massive lay-off of its employees. But with the population migrating to Florida, unemployment at 15 percent and a shrinking GDP, this would be more than devastating.
However, if Congress steps in, it could set a precedent for other fiscally troubled states like Illinois to follow suit and seek help from a government in the form of a bailout. This would be okay if it didn’t give a blatant thumbs up to bad financial management. Furthermore, it wouldn’t do much to adjust the bad economic policies the island has instilled, like a high minimum wage or too much paid time off.
What are your thoughts on Puerto Rico? Should we or should we not get involved with this island’s mess? Or should we recommend our first solution we offered back in July of 2015: a Jurassic Theme Park?
