Puerto Rico Lurches Toward Default with No Solution in Sight

Puerto Rico default
Puerto Rico’s territorial status is one key to fixing the debt crisis. (Dmitry K)

This must have been what Robinson Crusoe felt like.

Tossed upon an unknown shore in a storm, waking up to find an empty ship stuck on a reef in the Caribbean and then scrambling to salvage every little resource. Rebuilding your existence is easier when you’re not starting from nothing.

The Puerto Rican government stands amid a similar perfect storm. Monday, May 2 was the due date for the island to choose between either paying off or defaulting on debt it owed to creditors, but the territory’s Government Development Bank couldn’t make it happen.

Now, it’s going to be difficult for other territorial agencies to borrow in the short term — from the sewer agency that needs money for repairing leaky pipes to the highway agency borrowing for unexpected road work.

The May deadline for Congressional action to relieve the territory has come and gone with barely an acknowledging gesture. The population continues to fall as the productive members of society trade San Juan for New York, Miami and Washington. Nothing suggests the territory’s flagging economy will recover any time soon.

And so we creep closer to oblivion, day by day. New deals with creditors emerge and falter at an increasing pace. Officials tinkers with “essential” programs they deem deserving of the island’s remaining money, while everything else is considered a possible sacrifice.

In Puerto Rico, nobody is innocent from blame for the collapse, but you can’t point a finger at a single individual. From the outside looking in, the hope is the island’s problems might be quarantined.

In working to save the territory, there is hope that the actions do not set a precedent for states to declare bankruptcy and damage the American municipal bond market.

The Puerto Rico crisis has, by legislative quirk if nothing else, put America’s entire system of municipal Chapter 9 bankruptcy on trial. A win for the creditors would be better for rule of law, and a win for the pensioners and Puerto Rican government could put our nation’s fiscal future in the hands of public sector unions in places like Illinois and California.

No matter what happens with the debt situation, Puerto Rico’s economic future looks bleak. It won’t be completely resolved until the island’s territorial status has been decided.

Though the current debt relief proposal in Congress includes provisions for making such a decision, that is a long-term answer we simply can’t afford to focus on right now. At best, statehood is a decade or more down the road, while at worst the status quo will remain for a few more generations.

There are no short-term answers to the Puerto Rico crisis. Only economic growth can undo decades of poor leadership. The current proposal before Congress doesn’t do enough to make this growth a reality, despite it being the only tangible way the federal government can help right the island’s wrongs.

This means serious reforms that will make life worse for some Puerto Ricans, but which will help the economy in the short and medium term.

Real reform would force the Puerto Rican government to undergo a comprehensive reorganization. This means consolidating some of the thousands of municipalities and government bodies into a more organized and unified system conducive to entrepreneurial Puerto Ricans looking to start businesses.

Such a change would deregulate trade regulations and allow competition to thrive. It would mean privatizing vast swathes of government, from the electric companies to the highways to the Government Development Bank itself. And it would mean exempting the federal minimum wage just like some other U.S. territories.

With the pieces of a shattered economy and the debt crisis passed, the Puerto Rican people will be able to rebuild their home, but only if they have the materials to do so. Economic growth is that material, and the only way to bring it back is by allowing the dynamism of the market to take hold and break the established, corrupted order currently in place.

Otherwise, we will be back in this situation in a decade, having the same conversation about a debt we can never seem to pay off.

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