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Puerto Rico Blues
The Biggest Public Bankruptcy in U.S. History Is Underway

Puerto Rico’s long-running debt crisis—a case study in blue model failure, brought about by a bloated public sector workforce and inability to control pension obligations—reached a critical milestone yesterday as the island filed for bankruptcy under a special system created by Congress last year. Bloomberg reports:

Puerto Rico has finally and officially filed for protection from its creditors in what amounts to the biggest municipal bankruptcy in U.S. history.

Now comes the real reckoning. After years of wrangling in Washington, San Juan and on Wall Street — a fight that has pitted hedge funds against some of the poorest U.S. citizens — a federal judge may at last help decide who gets paid, and how much.

For both sides, the showdown will mean pain, as well as opportunity. Bondholders are certain to take a hit, with the commonwealth saying it can’t pay in full. Puerto Rico, meantime, will find no easy fix for an economic crisis that has driven many thousands of its citizens to the U.S. mainland during a decade-long recession and years of borrowing to cover budget gaps.

This proceeding is significant, as Mary Williams Walsh notes in the New York Times, because the failures of governance that forced Puerto Rico belly-up are endemic in cities and states on the mainland as well—especially Democratic-run cities where the blue model is most entrenched. Nationwide, unfunded pension liabilities for public sector workers exceed $3 trillion dollars.

Without major reforms, more major bankruptcies are likely in the not-so-distant future, especially in the event of another recession. There have already been rumblings to that effect in Chicago, the largest city that is under the most strain. Puerto Rico’s bankruptcy will guide assumptions for policymakers and creditors as they try to manage the blue model crisis going forward. Which investors will take haircuts, and how sizable will they be?

Congress and Treasury officials, too, should be watching this process closely. The improvised restructuring and oversight process just set in motion is designed to put Puerto Rico’s government back on track. The federal government may be asked to intervene once again as the fiscal vise tightens around other U.S. states and localities; and it’s crucial that it has a plan for managing the coming wave of fiscal distress.

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  • ——————————

    Chicago is on the verge of bankruptcy…while they are the most vocal about wanting to be a sanctuary city…leftism really is a disease….

  • PCB

    Puerto Rico is America’s Greece; Chicago, LA, our Italy, and Spain…

  • Dale Fayda

    Pain, pain and more pain. Just like with Obamacare, I fervently hope that this bankruptcy causes as much pain for all involved as possible. I see that as the only conceivable way of weaning society off social democracy, aka Blue Social Order.

  • Fat_Man

    The sound of Champagne corks popping comes from the partner’s offices in many Wall Street Law Firms.

  • seattleoutcast

    This is obviously a case of republicans not giving bureaucrats enough money.

  • Pait

    The problems of Puerto Rico are of a completely different nature than those of mainland states. Puerto Rico has a much less productive economy, similar costs and the same currency as the US, and significant barriers to personal mobility. In a way one could compare its situation to that of Greece in the eurozone.

    Puerto Rico is not like a separate country that could impose austerity via a currency devaluation, nor like a US state that can solve its problems easily with people moving in and out of the state, and via bailouts such as Florida’s after the 2008 crash or Texas after the Savings and Loans collapse. It doesn’t seem the author of the post understands the fundamental economics of the case.

  • Unelected Leader

    The People’s Republic of Vote Blue Sychopants colloquially known as California accounts for $1trillion of that. And with quite the wealth disparity to boot!

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