The avalanche of news coverage on the presidential campaign and the ensuing Trump presidency have buried a lot of issues. Like there was that dentist who killed a lion, that dress where people couldn’t tell if it was white and gold or blue and black, and, oh yes: the debt threatening to drown the island of Puerto Rico like a modern-day, less-rich Atlantis.
Grown-ups in Washington had to take Puerto Rico’s credit card away, drop it in a glass of water, and put into the public-policy freezer until the lovely island learns to manage its finances properly. To help them put their house in order while the credit card is on ice, Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) which created an oversight board to help the island restructure its debt.
Basically, Puerto Rico was put into a financial timeout and Congress had to come up with an appropriate punishment. They’re not mad at Puerto Rico – they’re just disappointed.
Puerto Rico has lots of debt – $70 billion and counting – but a tiny economy of only $103 billion, an aging population, and a rapidly disappearing labor force. Making matters worse, as the debt started piling up Puerto Rican leaders started getting desperate, they started making bigger and bigger promises to prospective bondholders. And these same leaders kept recklessly spending money they were never going to have. Adding insult to injury, retirees took out more than $1 billion in loans, leaving the retirement system with personal loans to retirees representing around half of its total assets.
You want to feel sorry for Puerto Rico, but the government’s actions were so egregious and spending so flamboyant that it’s hard. Thankfully, that recklessness is now being turned around – whether you agree with the way that it is being turned around or not – by the PROMESA Oversight Board. The board is starting their work to fully right the wrongs of Puerto Rico’s past in large part by “restructuring” (read: destroying) some of that debt.
This is going to be hard work. Puerto Rico’s debt isn’t like one credit card bill that refuses to go away: it’s spread out over many creditor classes, it was purchased at different times, it was purchased under different agreements, and a lot of competing interests have stakes in it. The board members understandably are under a lot of pressure.
So, what should they do?
Should they pay the oldest debtors first? Probably not. Should they pay the newest debtors first? Probably not – but maybe. Should they just arbitrarily make decisions about what classes of debtors get payment? No. Never. Not even a good idea to discuss. Do that and debt-holders won’t be mad and disappointed about Puerto Rico debt now — they will be less likely to invest in the future.
However, that appears to be what the board is preparing to do. Its current plan is a mere 15 percent cut to the Puerto Rico Electric Power Authority (PREPA) debt, a public corporation that provides electricity to Puerto Ricans, and a 77 percent cut to the debt held in general obligation bonds (some classes backed by the Puerto Rico Constitution) and COFINA bonds (which are backed by sales tax revenue).
This is one of the reasons I didn’t support PROMESA in the first place. Between the numerous classes of debt, and the numerous promises made by the Puerto Rican government, this monkey fist is going to be hard to untangle. However, to maintain future value in bond lending to Puerto Rico, or anyplace, it is imperative that the board gets this right. It needs to respect the deals that the debt was purchased under and not lean toward one direction or another because of political pressure. When giving their inevitable cut – which will likely hurt future borrowing already – a fair hand will go a long way towards helping stabilize the market.
The term “fairness” is often misused in politics (frequently applied to very unfair policies). In this case, fairness means Puerto Rico respecting its bond agreements as best as possible. It means not treating one bond deal as more important that another. That means that the debt restructuring shouldn’t be arbitrary; it should be rational and reasoned with an understanding that future bondholders are looking.
Because of the importance of this issue in states and localities across the country, Congress should be jumping up and down about the proposed PREPA deal and telling decision makers in PR and on the board to consider the island’s debt load in total, not piecemeal and arbitrarily, to solve Puerto Rico’s immediate problems.
Then the Oversight Board can move onto the work that everyone in the political fight agreed on: a realistic plan to cut spending, grow the Puerto Rican economy, and stave off future financial crises.
Then maybe we can unthaw their credit card.
Charles Sauer (@CharlesSauer) is a contributer to the Washington Examiner’s Beltway Confidential blog. He is president of the Market Institute and previously worked on Capitol Hill, for a governor and for an academic think tank.
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