News and Commentary

7 Things You Need to Know About The Puerto Rico ‘Bailout’

You may have seen a commercial or two, or fifteen, about the so-called Puerto Rico “bailout” Congress is considering. Across the country, airwaves have been inundated by ads, like the one posted below, attacking the plan to “bailout” Puerto Rico.

And yet, there’s only so much information that can be squeezed into a dramatic commercial narrated by a sympathetic elderly woman.

Since Puerto Rico is officially an unincorporated territory and not a US state, there are very few safety nets available to the small semi-autonomous island. The few options that are being discussed have prompted a firestorm of debate both on Main Street and K Street.

The economic situation in Puerto Rico is dire. The small island is utterly devastated by a debt so massive that Puerto Rican officials have defaulted on loan payments almost habitually. Puerto Rico’s Government Development Bank paid only $628,000 of the $58 million due creditors, [a credit] agency said. It said the decision “reflects the serious concerns about the Commonwealth’s liquidity” and the need to ensure “essential services (residents) deserve are maintained,” reports USA Today.

Puerto Rico’s debt is far worse than any other American municipality. To compare, Puerto Rico’s outstanding debt of $72 billion dwarfs Detroit’s $20 billion debt at the peak of the city’s financial crisis.

Here are 7 things you need to know about the Puerto Rico “bailout”:

1. The proposal in question, H.R. 4900, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), was first introduced by Rep. Sean Duffy (R-WI). The bill is now being championed by Republican Speaker of the House Paul Ryan. According to the speaker’s official website, the bill hopes to achieve the following goals:

1) It protects American taxpayers from bailing out Puerto Rico.

2) It brings order to what will be debt-restructuring chaos if Congress does not act.

3) It gives the territory a chance to make conservative, limited government reforms.

One priority the groups reiterated over and over again is that this legislation is Congress’s best tool to avoid a taxpayer bailout of Puerto Rico.

Ryan has explicitly opposed direct aid to the island.

2. Over $200,000 has been poured into lobbying and advertising efforts to oppose the “bailout.” The Center for Individual Freedom is a 501(c)(4) is the main force behind the ads flooding national airwaves. The commercials depicts PROMESA as anti-American, arguing that the debt plan is nothing short of “bailout” (akin to what the federal government did for Detroit) that will ultimately be a burden on the “backs of savers.”

3. The ad campaign is likely being funded by bondholders set to lose money after debt restructuring. The Washington Post reported that there is “widespread belief on Capitol Hill that the group is acting at the behest of those bondholders opposed to a court or board-imposed restructuring.”

While The Center for Individual Freedom is not required to disclose its donors, some bondholders have been voicing their opposition to the “bailout” for months now.

In stark opposition, other owners of Puerto Rican securities are eager to have the Congressional program pass through the bureaucratic obstacles as quickly as possible.

“Hedge funds that own about $5 billion of Puerto Rico’s general-obligation bonds, which are guaranteed under the island’s constitution, are fighting the House measure that would give the U.S. territory ability to write off some of its $70 billion in debt,” explains Bloomberg Business. “Firms that own securities backed by sales taxes are working to ensure its passage, seeing it as a way to protect their investment from a cascading series of defaults.”

4. Legally speaking, the Congressional “bailout” plan isn’t a bailout, but a debt restructuring program. According to The Washington Post’s Fact-Checker, the ads characterizing PROMESA as a “bailout” are slightly deceptive. The Post clarifies:

Is it a “bailout”? Not in the sense that most people have come to understand a government bailout, such as rescues of the bank and auto industries during the economic recession….Instead, a control board would oversee court-ordered restructuring, and conduct a financial audit. A judge would ultimately have power to reduce the island’s public debt.

5. The so-called “bailout” doesn’t appropriate any US taxpayer dollars to Puerto Rico. Congress is not redirecting any taxpayer funds to “bailout” despite the aggressive ad campaign to suggest otherwise. As stated earlier, PROMESA will instead create an oversight committee to restructure Puerto Rican debt.

6. Opponents nonetheless claim that PROMESA is a de facto bailout since Congress is using Bankruptcy Law to alleviate Puerto Rico’s debt burden. As The New York Times reported, “The bill, which would give Puerto Rico certain powers that are normally available only in bankruptcy” and “halt most creditors’ lawsuits against Puerto Rico, another provision that is normally available only in bankruptcy.”

7. The alternative to debt restructuring may be a protracted legal battle, costing creditors more money and plunging Puerto Rico further into financial insolvency. The financial crisis in Puerto Rico is really a Catch-22 for bondholders. While debt restructuring may yield a lower return on bond investments, waiting it out and aggressively pursuing litigation may end up not only paralyzing Puerto Rico’s ability to pay back owners of securities, but damaging costing creditors exorbitant amounts of money in court. “Without an oversight board, creditors would resort to a years-long legal battle that may result in even lower returns after legal fees,” notes The Post.

As unemployment skyrockets and taxable income diminishes, Puerto Rico’s government is essentially insolvent. If the territory’s debt isn’t restructured in some way that alleviates the crushing debt burden, then Puerto Rico may be left in dire straits. Bottom line: the territory risks running out of cash and may have to default on its debt payments. “If it simply stops making debt payments, it is likely to be sued by one creditor group after another, creating a tangle of lawsuits that could take years to unravel,” adds The Times. “In the meantime, Puerto Rico would be a pariah in the bond market, unable to borrow affordably.” That scenario leaves Puerto Rico with little to no options. Moreover, it leaves creditors hung out to dry.

Still, Congress’ plan to restructure the debt is an unprecedented move that may open a pandora’s box of problems. Some in Congress are worried about “setting a dangerous precedent by giving Puerto Rico extraordinary tools to wipe out debt, fearing it would not be long before troubled states like Illinois came to Washington seeking the same thing,” according to The Times.