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Puerto Rico on the brink

Mar 11,2019 - Last updated at Mar 11,2019

WASHINGTON, DC — More than 3 million Americans, residents of the US commonwealth of Puerto Rico, could be plunged into economic turmoil unless President Donald Trump’s administration acts quickly. Unfortunately, there is no sign that Trump is paying attention to the problem; he is distracted by other matters. And, because no one else has the authority or will to take action, a tragedy looms.

Puerto Rico borrowed too much money in the boom years and has struggled with an overwhelming debt burden over the past decade. When a company is in this situation, the outcome is some form of bankruptcy: the debt is restructured or the company is wound down. The same logic applies at some levels of government in the United States, with court supervision of debt restructuring ensuring relatively orderly outcomes, invariably after a great deal of argument about debt levels and how to reduce payments to an affordable level.

But, because of Puerto Rico’s particular legal status as a US territory, it is not eligible for any kind of standard court-run debt restructuring process. Recognising this, in 2016 Congress passed the PROMESA Act, which enabled a form of court-supervised bankruptcy, along with an oversight board in charge of monitoring and approving fiscal plans in Puerto Rico. This was a pragmatic political compromise worked out by the US Treasury and congressional Republicans and Democrats. I supported PROMESA at the time, including in congressional testimony.

But now this entire arrangement has been called into question by a recent court decision that invalidates the legal authority of the oversight board. At issue is a purely procedural issue — whether the board was appointed properly as specified in the legislation, or whether its members should have gone through a Senate confirmation process.

The main plaintiff is a hedge fund that is not happy with the current arrangement. But, as David Skeel, a highly respected bankruptcy expert and member of the oversight board, notes in a recent commentary, “Puerto Rico would collapse into chaos if the ruling took immediate effect.”

Skeel is not exaggerating. If the oversight board is deemed unconstitutional, the most likely result will be the collapse of the court-run process and a mad scramble by all of Puerto Rico’s creditors to seize its assets in any way they can. As a result, it would be very hard for any local government to operate. Supplies of essential goods, including fuel, could well be disrupted. The ability to generate electrical power on the island could also be jeopardised.

The precise legal situation remains in flux. One court has determined that the board is unconstitutional, but granted 90 days for board members to be appointed, in its view, appropriately. Another court, hearing a different case, has upheld the board’s appointment. The Supreme Court may or may not get involved.

This is a mess with an easy solution. Trump could immediately nominate, and the Senate could confirm, the current oversight board members, or, as Skeel points out, a new set of board members could be chosen. Such a process normally takes many months, or longer, but in this instance there is a strong case for expeditious action.

Sadly, there is no sign that the Trump administration is taking the situation seriously. After Hurricane Maria hit Puerto Rico in 2017, Trump made a show of delivering aid, but the reality was that the island received too little assistance, and too late, to make a difference for many people. The death toll from the hurricane was significantly understated by the administration for far too long.

More recently, Trump has even talked of diverting funds from rebuilding Puerto Rico to constructing his pet project, a wall on the US-Mexican border. The legality of this has been challenged, but, given the suffering and continued vulnerability of Puerto Rico’s people, it is shocking that Trump would even consider such a move.

Trump’s cynical and cruel calculus is, however, understandable. Although Puerto Rico’s people are US citizens, the island is not a state, and therefore has no representation in the Senate and only one representative, with limited voting rights, in the House. This lack of political voice in Washington, DC, has hurt for a long time, and now threatens to destroy Puerto Rico’s prospects for economic recovery.

Puerto Rico needs a lot more than just debt restructuring. The island has substantial economic potential, but realising it requires putting essential public services like education and healthcare back on their feet. To do that, the payments due on the outstanding government debt need to be reduced, and in a way that does not involve a mad scramble by creditors to seize assets.

The Trump administration needs to pay attention, before it is too late.

 

Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with Jonathan Gruber of “Jump-Starting America: How Breakthrough Science Can Revive the Economic Growth and the American Dream”. Copyright: Project Syndicate, 2019. www.project-syndicate.org

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