by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Code red! There’s no doctor in the house for fiscally flat-lining Puerto Rico. President Barack Obama is unwilling to inject dollars into the debt-riddled U.S. territory, fearing a bailout would force him to administer similar medicine to mainland sickies like Detroit and his home state of Illinois. As much as Obama likes to talk about flinging money at problems, such as that humanitarian crisis on our border, he’s not willing to take the political risk of tossing greenbacks at fiscally irresponsible communities. Consequently, owners of Puerto Rico’s debt—and this includes investors in about 66% of domestic municipal-bond funds—should brace themselves for the absolutely worst outcome, because the only person in the emergency room is the patient.
There’s no hope of Congress rushing to the rescue, either. The same negative sentiment about aiding fiscally irresponsible governments expressed by the White House pervades Capitol Hill, says Pedro Pierluisi, Puerto Rico’s nonvoting member of the House of Representatives. Even a Pierluisi-inspired bill authorizing “technical assistance” for Puerto Rico from the Treasury is languishing in the House after being approved by the Appropriations Committee. The assistance would allow Treasury experts to advise the territory on the best way to access existing federal assistance programs used by states.
This is a mere Band-Aid for Puerto Rico, which has a budget deficit of $640 million and $70 billion in outstanding debt, most of it downgraded to junk by Moody’s Investors Service after the legislature changed its laws to allow the restructuring of $20 billion in bonds sold by its water, electric, and transportation authorities. As my Barron’s colleague Andrew Bary reported on July 7, the law leaves bondholders with few rights (“Puerto Rico: The New Detroit”). In other words, Puerto Rico’s politicians voted themselves a license to rob them.