Puerto Rico is careening toward default, special bankruptcy, a backdoor bailout, or something else that will force a serious debt restructure on the troubled territory. That’s the lesson from an excellent piece in Forbes that explains how Puerto Rico has charted the course to blue model destruction. After much hemming and hawing the last ten years, it’s clear the political will to reform the economy simply doesn’t exist, and some sort of bankruptcy-like scenario is inevitable for what can properly be called a failed commonwealth:
It is clear that the current business model is unsustainable and default or restructure is not if, but when. Restructure to avoid bankruptcy would imply an agreement by bondholders to take a principal haircut usually with some demonstration of fiscal reform or an increase in collateral. A voluntary restructuring like this is unlikely given the vast numbers of bondholders and their disparate opinions to achieve their goal of getting paid back. […]The Obama Administration too will be tempted to woo the nearly four million potential Democrat voters into their good graces with another option: the cushy bailout. Politically, there’s about as much chance of this happening as there is Boehner and Obama enjoying cocktails together on weekends. Bailouts, however, aren’t always comprised of direct cash injections and the Obama Administration has proven its adroitness in finding behind-the-scenes alternatives.
No matter how the restructuring plays out it’s going to be ugly. A chart drawn together by the Washington Post shows how Puerto Rico’s $70 billion public sector debt load makes it more akin to formidable debt-ridden states like California and New York than to a metropolis like Detroit.This is where the unreformed path of blue model governance eventually leads. Public officials in Puerto Rico and the bondholders and rating agencies pressuring them to increase revenues have known about the island’s problems for years. But the political class to this day hasn’t come up with a single meaningful structural fix, opting instead for ever more taxes on corporations (especially foreign ones)—the only reliable sector and revenue cow left.2014 will see Puerto Rico’s pensions only seven percent funded, less than one percent of its bond debt restructured, just 41 percent of its labor force in participation and 14 percent of its working age citizens unemployed. Puerto Rico is a failed experiment in blue governance, and its worst days are still ahead.