Puerto Rico Blues
Chapter Nine for Puerto Rico?

New York Governor Andrew Cuomo is the latest Democratic official to follow Treasury Secretary Jack Lew’s lead and come out in favor of federal bankruptcy protection for Puerto Rico. The Wall Street Journal reports:

About an hour into the flight to the commonwealth, Mr. Cuomo said for the first time that he supported giving Puerto Rico the ability to pursue bankruptcy protection, a position that puts him in line with most of his fellow Democrats.

Mr. Cuomo also endorsed the notion of giving Puerto Rico “relief from the Medicaid cap,” saying the territory should have “fairness” with regard to Medicaid reimbursement.

“This is a situation that is not all of their making,” the governor said during the flight, “They are unique in the way they are governed with federal laws.”

Besides, Mr. Cuomo said, “the problems of Puerto Rico will wind up migrating to New York.”

Prominent Democrats, including Puerto Rican New York City Council Speaker Melissa Mark-Viverito and presidential contender Hillary Clinton, whom the governor has endorsed, have long backed giving Puerto Rico’s municipal agencies the ability to seek chapter 9 bankruptcy.

A federal law giving bankruptcy protection to Puerto Rican government agencies could raise some thorny legal issues. Bondholders bought these bonds under one set of rules; can Congress change the rules of existing contracts in a way that would disadvantage good faith purchasers of debt? And if that does happen, what would be the consequence for other government entities and U.S. financial markets if politicians can change the rules whenever they don’t like them?

At the same time, Puerto Rico does have some legitimate grievances. The islanders haven’t dug this pit all by themselves. They have had help from Washington.

As we’ve written before, however, the bottom line has to be ‘real relief for real reform’. The feds could consider ways to help with the territory’s debts if Puerto Rico makes real, lasting changes to policies that have helped to produce this meltdown. We’re talking about things like the end of public unions, drastic changes in governance, haircuts all around, and tax reforms.

Many of these will be as unpopular as anything the Germans suggested to the Greeks. But bankruptcy is a sign that you are doing something terribly wrong, and it would be unrealistic of Puerto Rico to expect the U.S. Congress and Treasury to act as permanent enablers of unsustainable behavior.

Update: A working group set up by Governor Alejandro Garcia Padilla has just released a plan to cut spending and overhaul taxes, but that they claim would still not allow Puerto Rico to meet its obligations to bondholders in the next five years, even if it was wholly approved by Puerto Rico’s legislature. Something tells us from initial reports that this is not the reforms we are looking for.)

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