Puerto Rico’s Debt Woes Could Hand White House to Democrats

Puerto Rico High Resolution Debt Concept

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By Patrick Watson | Wednesday, 11 Nov 2015

With $72 billion in unpayable debt, Puerto Rico is in deep trouble. So are its lenders.

Naturally, they want all their money back.

If the lenders get their way, the rest of us could pay a steep price. Their solution may well put Hillary Clinton or Bernie Sanders in the White House for at least four years.

Here’s why.

Puerto Rico’s governor, Alejandro Garcia Padilla, said on June 29 that the U.S.-owned territory could not repay its massive debts. The commonwealth and various governmental entities ran up huge bills and pushed repayment out into the future. Now the future is here.

Was the spending wasteful? Probably so, but that isn’t the point. Someone has to hold the bag. The question is who it will be.

Similar situations in the fifty states normally land in bankruptcy court. The city of Detroit is so far the largest municipal bankruptcy, though Chicago may not be far behind. In such cases, the court considers arguments from all the parties and tries to reach a fair compromise.

Bankruptcy is not a perfect system, but is usually better than the alternatives. Donald Trump’s business bankruptcies are good examples (see “Trump Teaches Americans a Bankruptcy Lesson”).

As Trump argued in the first presidential debate, “Lenders aren’t babies.” He was exactly right. When you make a loan, you voluntarily accept repayment risk. Higher interest rates compensate you for taking that risk. Occasional losses are part of the deal.

In Puerto Rico’s case, bankruptcy is not an option. Current federal law does not let U.S. territories declare bankruptcy. The island’s leaders want Congress to change this.

Otherwise, the territory could be stuck in financial limbo for generations.

A group of hedge funds that own Puerto Rican debt (bought mostly at deep discounts) opposes this move. Rather than take their lumps and move on, they want to make island slash education, health care and infrastructure spending.

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