Puerto Rico’s mess: No US bailout for bad borrowing (and lending)

Subscribe Now Choose a package that suits your preferences.
Start Free Account Get access to 7 premium stories every month for FREE!
Already a Subscriber? Current print subscriber? Activate your complimentary Digital account.

The government of Puerto Rico owes its creditors some $73 billion in debt it can’t pay, facing default on $2 billion of it due July 1.

The government of Puerto Rico owes its creditors some $73 billion in debt it can’t pay, facing default on $2 billion of it due July 1.

The question is, who pays or who eats the debt? The three alternatives are the Puerto Ricans who borrowed the money they now can’t pay back. Or the vulture hedge funds that loaned them the money they knew the Puerto Ricans couldn’t pay back? Or the American taxpayer in the form of the federal government in Washington, under pressure from lobbyists through the Congress to come up with a big bailout?

Puerto Rico, an American territory with a population of 3.5 million, got itself into this mess through continuing to buy municipal bonds in the face of falling government revenue to prevent cuts in services and layoffs of public service workers. In 2000, its debt stood at $25 billion. By 2008, early in the recession, it had risen to $53 billion. Now it stands at $73 billion.

More than half of that is thought to be owed to 44 investment funds, some of them respectable such as Oppenheimer and Franklin Templeton, some of them so-called vulture firms, based on the bird that scavenges carcasses on the highway or in the forest. Hedge funds buy debt from economically ruined entities such as Argentina, Greece, Detroit and Ukraine at bargain rates and then lobby or sue to get paid at face value by international banks or countries that agree to bail out the distressed debtor.

Puerto Rico’s municipal bonds are tax-exempt, free of taxes to be paid to federal, state or local bodies by the holder, making them doubly attractive to lenders who are not picky in incurring risk.

The U.S. Supreme Court last week rejected a bid by Puerto Rico to restructure some of its debt, suggesting Congress was the only answer to the island’s dilemma. Puerto Rico cannot file for bankruptcy.

Lobbyists for the hedge funds are now putting pressure on members of Congress to use federal money to bail Puerto Rico out. Lobbyists in the past included former Federal Reserve Chairman Alan Greenspan and Chelsea Clinton. The political threat they are using is that, if Puerto Rico is not bailed out, thousands of its population will emigrate to the mainland.

The island has a weak economy and inefficient if not crooked government. Federal control, which is one option, includes an external appointed oversight board, which the Puerto Ricans oppose.

Why not just let the hedge funds and the Puerto Ricans accept the consequences of their irresponsible borrowing?

— Pittsburgh Post-Gazette