MarketWatch, October 5, 2017
“We're going to have to wipe that out,” Donald Trump said yesterday about Puerto Rico’s massive debt load. Though White House officials had walked the comments back by Wednesday morning, the paper towel Pop-A-Shot president opened a discussion far too few politicians have been willing to take on. We may not be able to trust Trump’s word, but anyone who cares about Puerto Rico’s recovery should be trying to hold him to his word.
Puerto Ricans have already suffered through more than a lost decade, with zero economic growth. Unemployment is over 11 percent, and about half the country is in poverty. The government, handicapped by a colonial legacy of unequal treatment and policy decisions made here in Washington, has borrowed in order to ― quite literally ― keep the lights on. In 2016, with Puerto Rico unable to continue servicing its $74 billion debt, and blocked from traditional bankruptcy proceedings by its “special” political status, Congress passed legislation in an attempt to address the crisis.
PROMESA, as the legislation is known, put Puerto Rico’s finances in the hands of a federally-appointed junta that effectively exercises veto power over the budget and major expenditures of the government. Now, Puerto Rico finds itself bogged down in court hearings with its creditors in bankruptcy-like proceedings outlined in the legislation. Even before the hurricanes, this process was leading Puerto Rico down the path to another lost decade, or more. The junta running the budget has attempted to squeeze every penny out of the economy, pushing harsh austerity policies on the American citizens of Puerto Rico. But according to their own estimates, even after a decade of further misery-inducing policies, just $7.9 billion would be freed up to pay back bondholders. Tack on a tens-of-billions-of-dollars-relief-and-reconstruction effort and the writing is on the wall: Puerto Rico’s debt is not getting paid back.
The vulture funds have been hovering over Puerto Rican debt for years, scooping up the distressed assets and angling for a big payday when, so they thought, Puerto Rico would be legally compelled to make them whole. After Maria’s devastation, one group of bondholders ― currently fighting Puerto Rico in court ― even cynically offered to loan more money. After Trump’s comments, Puerto Rican bond prices fell to their lowest level ever. “I don't know if it’s Goldman Sachs” holding Puerto Rico’s debt, “but whoever it is, you can wave goodbye to that,” Trump said.
Meanwhile, as the long and costly court proceedings on the debt drag on, austerity policies will continue to ravage the island, leaving Puerto Rico even less capable of paying off its debt. The fact is that Puerto Rico’s debt is going to have to be renegotiated, involving both significant cancellation and restructuring, just as a sovereign nation would do in a situation in which its debt is absolutely impossible to pay. Of course, Puerto Rico is not a sovereign nation or even a state, preventing it from charting an independent policy course that could restore economic growth and reverse the decade-long decline in living standards on the island. Given Washington’s role in creating the crisis in the first place ― and now with the added costs of the hurricane damage ― there’s a good case to be made that the US government should help resolve the crisis now. (Puerto Rico is entitled, by US law, to the same federal hurricane relief as Texas or Florida.)
If Trump is serious about helping Puerto Rico recover, the White House could step in today and use the power of the presidency to push bondholders toward accepting a viable solution to the debt impasse. First, that solution would have to allow the economy to recover from its lost decade. This would mean substantial relaxation of budgetary constraints by the junta and billions of dollars in stimulus from Congress, much of which could go to recovery efforts. Further, to the extent the debt is restructured, much of the debt service must be postponed until Puerto Rico’s economy has regained its strength, and the needs of the population can be met.
In his comments to Fox News’ Geraldo Rivera, Trump said that Puerto Rico owes “a lot of money to your friends on Wall Street.” The biggest obstacle moving forward is likely to be Trump’s friends from Wall Street, many of whom he has surrounded himself with in office. But Trump, knowing a thing or two about bankruptcies himself, is at least likely to understand the necessity of debt relief for Puerto Rico if the island is ever to recover.
Jake Johnston is a Research Associate at the Center for Economic and Policy Research (www.cepr.net) in Washington, DC. He is coauthor of the research reports "Life After Debt in Puerto Rico: How Many More Lost Decades?" and "More Trouble Ahead: Puerto Rico's Impending Medicaid Crisis."