Puerto Rico’s looming Katrina-style disaster

US Congress must pass a bill to allow restructuring of island’s debts

8594b1af-bbe1-416c-ac74-05c9f6fd57c6If Puerto Rico were a US state, or an independent sovereign, it would long since have declared bankruptcy. Instead, the cash-starved island is subsisting in a legal limbo that closes off any means of restructuring its debt. On Monday it defaulted on a $422m bond payment. In July, it will almost certainly miss a $1.4bn payment that will trigger a lengthy court battle to rival that of Argentina.
It does not have to be this way. A bill before Congress would put the US territory under an independent board that would have the power to restructure its debt. It is supported both by Paul Ryan, the Republican speaker of the House of Representatives, and the Obama administration.

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Ordinarily that would be enough to ensure its passage. Yet the island’s hedge fund creditors are lobbying ferociously against what they have branded a “taxpayer bailout”. Their opposition is based on pure disinformation. The bill entails no such thing.
Puerto Rico is in the throes of a full-blown solvency crisis. With interest payments at 36 per cent of its current budget, the island’s burden is six times the average for US states. For years it has been borrowing to fund operating budgets. Yet its per capita income is just half that of Mississippi, the poorest American state.
Deprived of relief, Puerto Rico’s government has had little choice but to close down schools, slash municipal services and prompt a further exodus of Puerto Ricans to the mainland. Last year, 2 per cent of its people left the island. In the absence of debt relief, the situation could turn into a Katrina-type disaster.
The island has already recorded more than 200 cases of the Zika virus at a time when septic tanks are left undrained because of service cuts. Were it a US state, Puerto Rico would long since have triggered the Chapter 9 bankruptcy law that allow municipalities and cities to negotiate restructured debts. The congressional bill would go further by putting the island territory under a federally appointed board that could override fiscal decisions by its legislature. Even that, however, is not sufficient guarantee for the island’s creditors, many of which — Argentina-style — have bought distressed Puerto Rican bonds in the knowledge this day was coming.
Explainer: Puerto Rico’s crippling debt problems
Flag of Puerto Rico at Capitolio, San Juan ID 41750618 © Wangkun Jia | Flag of the Commonwealth of Puerto Rico in front of Capitolio, San Juan, Puerto Rico. Extrasmall 480x320px 6.7″ x 4.4″ @72dpi compute
How did a small island of just 3.5m people amass $70bn of liabilities?
Yet owning another piece of paper is no fix. Obtaining a federal court ruling obliging Puerto Rico to pay full face value would not make the island territory any more capable of honouring its bonds. Quite the reverse: it would only hasten its economic collapse.
Mr Ryan’s political dilemma is acute. He could pass the bill now with Democratic support. Yet the Republican speaker is unofficially bound to the so-called Hastert rule, named after a predecessor, which dictates all legislation must be passed by a majority of a majority.
Unfortunately many in the Tea Party Freedom Caucus are terrified to endorse something that has been misbranded as a taxpayer bailout. A number of Democrats, too, are opposed to a bill that would deprive the island state of its fiscal autonomy and result in cuts to its pension payouts.
Yet the choice is a very simple one. Either the island spirals into a series of uncontrolled defaults that will wind their way through countless court battles. Or the default will be supervised in a way that can set Puerto Rico on a path to fiscal sustainability. The latter is infinitely preferable to the former. As it stands, a clear majority of Congress supports an orderly workout. Mr Ryan should not permit a clutch of opportunistic distressed debt holders to wield a veto over the public interest.

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