How Congress Can Help Puerto Rico

Waiting for Chapter Nine.

Photographer: Joe Raedle/Getty Images

According to Puerto Rico Governor Alejandro Garcia Padilla, the U.S. commonwealth has $72 billion in debts that it cannot pay. Maybe now Congress will start paying attention.

It's not as if Puerto Rico's debt exploded overnight. Since 2000, its public debt has risen from 60 percent of gross domestic product to more than 100 percent. Investors loved the tax-exempt bonds Puerto Rico sold to finance its deficits, and banks loved the fat fees. Except that as Puerto Rico's economic and fiscal fortunes continued to fall, the price it had to pay to keep borrowing kept going up.

Puerto Rico's Slide

Puerto Rico's government has warned before that its creaky and overleveraged public-sector corporations might have to restructure their debts. Its power company, for instance, owes $9 billion and has to come up with more than $400 million on July 1 -- money it doesn't have. Now Padilla says that Puerto Rico will seek to delay payments on all of the island's debt load for "a number of years." It will put together a restructuring plan that includes its general obligation debt, and hopes to get creditors to trade existing debt for new debt with longer maturities. Credit rating companies responded by putting Puerto Rico in the same category as Greece.

There's not much mystery about what Puerto Rico needs to do to get its fiscal house in order: Run a surplus and keep economic growth at a nominal rate that consistently exceeds the interest rate on its debt.   

At the moment, neither is likely to happen. In fact, the island's fiscal deficit is much worse than previously thought. And Puerto Rico's economy has been contracting for most of the last decade. Whatever the underlying factors, the effect is all too clear: Puerto Rico's unemployment is well over twice the U.S. national rate, poverty is almost double that of the poorest U.S. state, and the island has high crime, subpar educational levels and a population 5 percent smaller than a decade ago.

Puerto Rico's profligate politicians got it into this mess. But thanks to its curious political status as a U.S. commonwealth, even the most far-seeing among them lack the power to get it out. And don't look to the White House for real help. It has said, as it should, that no bailout is forthcoming.

The branch of the U.S. government that could do the most for Puerto Rico is Congress. It could start by pushing forward recent legislation that would extend the provisions of U.S. bankruptcy law to Puerto Rico. These protections aren't a bailout. They would just enable an orderly restructuring of Puerto Rico's debts.

Congress also needs to create an independent financial control board with the power to approve the long-term fiscal plans that Puerto Rico needs. Democratic? Hardly. Necessary? Very. Little in the last decade of Puerto Rico's political and fiscal history suggests it has the ability to make the painful choices it faces.

Finally, Congress should recognize that Puerto Rico in many cases needs less federal government, not more. Laws that require mainland cargo to be carried on U.S.-flagged and -crewed ships depress trade. The federal minimum wage puts Puerto Rican businesses at a disadvantage relative to their immediate neighbors. And so on.

Puerto Rico has more U.S. citizens than 21 U.S. states. Over the years, that hasn't mattered much to members of Congress, who have treated it as something less than an afterthought. It shouldn't take the prospect of ugly defaults in the $3.6 trillion municipal bond market to at last get their attention.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.