Puerto Rico Announces Plans to Default on Bond Payments

Published February 12, 2016

Lawmakers in Puerto Rico, a territory of the United States in the Caribbean Sea, announced in January their plans to partially default on $1 billion in monthly bond payments owed to investors in state-owned corporations, such as the territory’s Public Finance Corporation and the Puerto Rico Infrastructure Financing Authority.

The territory, which is currently led by Alejandro García-Padilla (Popular Democratic Party), is self-governed, but it is ultimately subject to legislation passed by the U.S. Congress.

Congressional Meddling

William Freeland, a research analyst with the American Legislative Exchange Council, says the current inability of the territory to fully pay its bills is caused in part by economic policies set by mainland lawmakers.

“They are still subject to U.S. minimum federal wage [requirements],” Freeland said. “The minimum wage in most of the mainland is about 28 percent of the median wage, and for Puerto Rico it is 77 percent. It is far, far above what the minimum wage is here. For example, the minimum wage there is as if we set it in the United States at 40 dollars an hour.”

Freeland says amending federal laws to allow states to declare bankruptcy is an option some in Congress are exploring. Currently, only city governments are covered by Chapter 9, Title 11 of the U.S. Code.

“Puerto Rico is more like a state than a city,” Freeland said. “So there is an issue in Congress of how they are going to deal with this. What’s being discussed are changes to municipal bankruptcy law.”

Bankruptcy proceedings are not a death sentence for states, Freeland says.

“You are forced to get a bankruptcy deal, and you are forced to make a confession to get back on your feet,” Freeland said. “This is the outcome that’s being pushed for, and it’s something that Congress is working on and will have to handle properly.”

Bad Options, Worse Options

Jon Perdue, a strategic advisor with Fundación Libertad, a new free-market think tank based in San Juan, Puerto Rico that is dedicated to “[working] together to protect the economic and personal freedoms” of Puerto Ricans, says there are good reasons to oppose extending bankruptcy protections to territories, but it may be the best option for Puerto Rican taxpayers.

“The main one is the moral hazard component, which could affect a number of municipalities on the mainland that may be nearing insolvency,” Perdue said. “But in reality, it would be worse for Puerto Rico to declare itself insolvent than to earnestly work out an agreement with creditors, because [working with creditors] would be the fastest way for Puerto Rico to regain the ability to issue debt for needed infrastructure upgrades and maintenance projects.

“They must restore the commonwealth’s credibility with investors quickly,” Perdue said.

Puerto Ricans ‘Hit Hardest’

“Moreover, while some of the commonwealth’s politicians claim that the U.S. Congress is treating it like a colony by not granting it bankruptcy protection, a significant portion of the island’s debt is actually owned by Puerto Ricans themselves, who could be hit hardest by a default,” Perdue said.

Gabrielle Cintorino ([email protected]) writes from Nashville, Tennessee.