Tuesday, October 6, 2015

Let Puerto Rico Go Bankrupt

By Ramesh Ponnuru

Proponents of Puerto Rican statehood have always said that the island's in-between status -- it's not a state, but not independent either -- leaves it with the worst of all worlds. The territory's fiscal crisis is illustrating the point.

Puerto Rico and its subdivisions amassed a lot of debt over the years, partly because the federal government gives them special treatment: Interest paid on their bonds can't be taxed anywhere in the U.S. And while federal bankruptcy law allows municipalities in states to file for Chapter 9 bankruptcy, municipalities in Puerto Rico can't do the same, because it isn't a state. That makes lending to them more attractive. But once they've borrowed more than they can repay, it makes it harder to clean up the mess.

Puerto Rico's Slide

Over the summer, Governor Alejandro Garcia Padilla said that Puerto Rico's $72 billion in debts were "not payable." He wants the federal government to apply bankruptcy law to Puerto Rico as though it were a state. Legislation to that effect is facing skepticism in Congress, especially from Republicans who say it would amount to a "bailout."

Usually, though, we use the words "government bailout" to describe the use of taxpayer funds to pay off the creditors of an insolvent institution. The bankruptcy bill would stiff the creditors, instead. Two conservative groups, Citizens Against Government Waste and Americans for Tax Reform, favor the bill because they think that the likely alternative is a real bailout -- Congress would spend money, they think, rather than let the island's electric company go dark because of its debts.

Other arguments against extending Chapter 9 to Puerto Rico are similarly wanting. Some opponents say it would "undermine investor confidence" in the island. Events would seem to have already done a lot of the undermining. In any case, that's an argument against having Chapter 9 anywhere, not just in Puerto Rico.

Read the rest here.


  1. Bankruptcy is really the only answer here (along with Detroit, Greece, etc) sometimes one just needs to bottom out and start over.

    1. Agreed. It also allows reality to come to those who "invest" in governments. The bond rates should reflect the true risk of the "investment", and they should not be bailed out by taxpayers outside the jurisdiction that floated the bonds.