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Puerto Rico: Letting Public Companies Default Is Not a Solution

By: Frank Worley-Lopez - Jun 24, 2014, 4:12 pm

Español What do you do if you recklessly accumulate too much debt and are having trouble paying? What about when the right solution means cutting jobs and salaries, and making tough political decisions? Well, the obvious answer is: just don’t pay.

As I write this entry, a bill is making its way through the Puerto Rico legislature that would allow public corporations on the island, including the embattled Puerto Rico Electric Power Authority and the Water and Sewer Authority, to declare bankruptcy. This action should send shock waves through the financial community and could be the start of what some experts have warned is a troublesome summer for municipal bonds. The bill could also open the door for bankruptcy for the Ports Authority and Transportation Department.

El Nuevo Dia reports the bill was discussed during a late night meeting at La Fortaleza (the Puerto Rico governor’s mansion) last night. Public corporation debt accounts for the bulk of Puerto Rico’s US$70 billion debt load. Bankruptcy protection could result in investors receiving only pennies on the dollar, and it would allow Puerto Rico to avoid making difficult decisions about the size of government.

The news comes despite the governor signing a fiscal sustainability bill that is intended to cut more than $1 billion in expenditures per year. While the bill orders the review of all contracts and reorganizing some agencies, it faces potential legal challenges from unions. It also does not address the primary issue facing the Puerto Rico government: a workforce of nearly 300,000 people across more than 100 agencies.

Roughly one third of employed Puerto Ricans work for the government at some level, and nearly a million people who could be working are either unemployed or simply no longer looking. This news will continue to develop during the next few weeks.

While I applaud the governor for declaring the emergency and finally taking serious, concrete steps toward putting the island’s fiscal house in order, the decision to discuss bankruptcy for public corporations shows they still do not grasp the real problem. Stay tuned.