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Will Puerto Rico be saved by Paul Ryan?

I am sure readers here know I am no fan of the GOP as lead by Mitch McConnell and Paul Ryan. However, I must very reluctantly give kudos to the GOP because they have somehow stumbled into trying to do the right thing in regards to the situation with Puerto Rico. This may be an instance of the broken clock being right twice a day:

Speaker Paul Ryan (R-Wis.) blasted Wall Street investors on Wednesday as he tried to tamp down conservative discontent with a bill to assist Puerto Rico.

The GOP leader charged that “special money interest groups on Wall Street” are trying to sabotage the legislation by billing it as a “bailout.”

Ryan said that the government will be forced to actually bail out the island if Congress fails to act, predicting massive defaults on its bonds.

“Many big-money interest groups on Wall Street know this and have put a lot of money toward sabotaging this legislation in order to force a last-minute bailout upon Puerto Rico, putting U.S. taxpayers on the hook for their bad loans,” his office said in a lengthy statement. “They call this a bailout, because they know it is not. And a bailout is what they want.”

Puerto Rico, like most of the other islands in the Caribbean Sea, has fallen victim to the Caribbean debt crisis. The island’s economy has been moribund for years, and when the 2008 crisis hit, they were never able to recover. Recent governors made good faith efforts to get the island’s finances back on track, but the debt has simply grown too large to manage. The island’s government is now contemplating capital controls:

Fast forward to today, when Puerto Rico Governor Alejandro García Padilla signed a measure into law Wednesday that would enable him to declare a moratorium on the commonwealth’s debt payments, mere hours after it cleared the Legislature amid concerns of securing enough support in the lower chamber and a full-court press by creditor lobbyists demanding changes to the bill.

What was more troubling is that in a move similar to what we have seen in Greece, only this time a voluntary one on behalf of the island and not its vassal owners (as happened with Greece), the newly signed Puerto Rico Emergency Moratorium & Financial Rehabilitation Act also empowers the governor to order the financially battered Government Development Bank (GDB) to restrict the outflow of cash in a bid to stabilize its dwindling liquidity levels, which stood at roughly $560 million as of April 1, according to the bill.

In other words, capital controls.

The reason for the possibility of capital controls is because the island faces a potential humanitarian crisis:

Puerto Rico has a total $72 billion of debt outstanding, most of it in the form of municipal bonds. It also owes at least $43 billion of government pensions that are almost entirely unfunded. It has stopped paying some of its vendors, and it risks losing its ability to provide essential services such as hospital care, clean water and electricity.

Puerto Rico really only has two options at this point to get out from under this debt burden. The first is an orderly bankruptcy proceeding to allow it to write down its debts to a payable level. The second is a direct bailout by an external party, most likely the government of the United States. The island simply lacks the capacity at this point to repay the debt normally.

While neither of these are a good option, bankruptcy is clearly the better of the two. The debt is not sustainable and needs to be wound down in an orderly manner, and better for a bankruptcy to happen than the US taxpayer having to fund a bailout. A taxpayer bailout would not go to rescue Puerto Rico, it would go to paying off the island’s creditors and only serve to delay badly needed reforms on the island while saddling the US taxpayer with the bill. For a preview of the likely outcome of the “bailout” road, look at what’s happened to Greece. Puerto Rico’s creditors need to take some responsibility for irresponsible lending.

The creditors are trying to force a bailout for obvious reasons; they want to be made whole and don’t want to have to write off any of the debt. If the bankruptcy bill does not make it past Congress and Puerto Rico runs out of cash to keep the lights on, a potential humanitarian crisis may develop on the island which would force the US government to bail them out to alleviate the problem. Let’s hope Ryan is able to get the bankruptcy law through Congress.

As a final note, what happens in Puerto Rico could potentially have consequences in providing a roadmap for when Illinois and California also inevitably go bankrupt. Keep an eye on this one, folks. It’s much more important than it looks.

 
Doomberg

Written by Doomberg

I am Doomberg, one of the original founding members of Sparta Report, and have been here since the beginning. I am an insatiable news junkie and enjoy reading and writing about the US territories, the Caribbean, video games, smartphones, and of course conservative politics in general.

I also really like pictures of gas stations and claim full responsibility for the silly gas station motif. I'm presently trapped behind enemy lines in a blue state with no hope of escape! The ride never ends.

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