The proposed Puerto Rican Restructuring Bill is to be welcomed as a first step towards resolving the island’s chronic debt problem and towards improving its economic and financial management. However, it is to be regretted that the bill seems to lack any vision as to how to extricate the island from its 10-year economic slump. Without restoring real economic growth to the island, the bill will be little more than a stop-gap measure to get us through the U.S. election cycle without a full blown Puerto Rican economic and financial crisis before November.
At the heart of the House Committee on Natural Resources’ Puerto Rican Bill, introduced by Representatives Sean Duffy (R-WI), Rob Bishop (R-UT), and Jim Sensenbrenner (R-WI), is the establishment of a seven-member oversight board for the island. That board is to have exclusive control to ensure that Puerto Rico’s fiscal plans are enacted and enforced as well as to ensure that necessary reforms are undertaken to help the island regain fiscal solvency. The bill also includes a stay on debt-related litigation to create an environment for consensual negotiations with creditors. It is explicit that it will not involve taxpayer money to bail out the island.
Beyond not involving a taxpayer-financed bailout for Puerto Rico, there would seem to be main two strengths to the current bill. The first is that it would ensure very much better fiscal management than the island has experienced in recent years. It would do so by subjecting the island to the effective management of an outside technocratic control board that would among other things demand greater fiscal transparency, greater spending efficiency, and better fiscal accounting from the island than it has had in many years.
The second main strength is that it would afford the island with a temporary stay on debt principal repayments to allow more time for the voluntary restructuring of its debt mountain. That stay would forestall an otherwise disorderly Puerto Rican default as early as July 1, when some $2 billion in debt repayments come due. This must be welcomed since a legal free-for-all that would almost certainly follow a full-scale default would adversely affect an economy already in the deepest of slumps.
The main weakness of the bill is that it offers very little in the way of measures to turn Puerto Rico’s dismal economic fortunes around. To be sure, it does envisage that the oversight board will insist on regulatory reform and that it will secure a reduction in the minimum wage for those Puerto Rican workers between 20 to 25 years of age. However, it would be fanciful to think that limited measures of that sort are going to provide the Puerto Rican economy with the major shot in the arm that it desperately needs to begin growing again.
The lack of real congressional economic support to Puerto Rico is all the more lamentable at this particular juncture since one must expect that the major fiscal belt-tightening that the oversight board will require of Puerto Rico will in itself have a significant adverse effect on that economy. Since stuck in a monetary union with the United States, the island lacks either monetary policy or exchange rate flexibility to offset the negative effects of tax hikes or public spending cuts sure to be demanded by the oversight board on the level of its aggregate demand.
The importance of revitalizing Puerto Rico’s economic growth cannot be overstated if a long term solution is to be found for its debt crisis. Since it should be obvious that if the island’s economy were to continue to contract at its present rate of around 1 percent a year and if 2 percent of its able-bodied population were to continue to migrate to the mainland each year as is presently the case, the island would become progressively less capable of servicing its $72 billion in public debt or honoring its $45 billion in pension liabilities. A lack of restoring economic growth would also mean that the island would probably need a series of debt write-downs over time.
If that indeed turns out the case, all that Congress will have done will have been to kick the can down the road and to have postponed Puerto Rico’s full-blown economic and financial crisis for another day.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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