ENLARGE
The Puerto Rican flag flies at the capitol building in San Juan. Photo: Getty Images
Salim Furth is a research fellow in macroeconomics at the Heritage Foundation’s Center for Data Analysis. He is on Twitter: @salimfurth.
Puerto Rico’s governor, Alejandro García Padilla, recently spent a week in Washington begging for an indirect bailout. The governor wants Congress to give Puerto Rico access to chapter 9 bankruptcy laws, which currently don’t apply to the U.S. territory. But Puerto Rico’s problems run deeper than its$70 billion debt.
The island has already defaulted on some of its debt and diverted funds from some debts with weaker legal obligations to make other payments. Partial default may be inevitable, but resistance to business and labor reforms may be part of the reason Congress has yet to act on Puerto Rico’s requests for help. Lawmakers might also not be pleased by a Caribbean Business report Thursday that Puerto Rico may try to maneuver on federal loans to the island’s public water and sewer authority (Prasa):
“Right off the bat, Prasa will no longer set aside money to service about $1.1 billion of its junior debt, most of which is guaranteed by the central government and includes federal loans made by the U.S. Department of Agriculture’s (USDA) Rural Development, which is owed $390 million, and the Environmental Protection Agency (EPA), owed $550 million.”
The story quotes the water authority’s executive president, Alberto Lázaro, saying of the suspended set-asides, “That doesn’t mean we aren’t going to pay.”
Because the debt is “junior,” the federal government’s claim on repayment is weak. Legally, “senior” bondholders and operation costs must be paid first. Because the loans are backed by Puerto Rico’s government, the cash-strapped utility can dump its obligations onto the governor.
But the commonwealth is $60 million behind in payments on its water bills so is unlikely to make good on its guarantee of the Prasa debt.
It’s not clear why the USDA and EPA lent large sums to Puerto Rico’s water utility at disadvantageous terms. Like other creditors, the federal government counted on the bankruptcy rules that apply in Puerto Rico at the time they lent funds. If Prasa cannot pay its debts, its creditors have a right to take over operations and implement reforms at the utility. That would be unpleasant for the bureaucrats who have managed Prasa, but it is likely to result in better service for Puerto Ricans.
Granting Puerto Rico access to the chapter 9 bankruptcy regulations would short-circuit possibilities for reform. Rather than giving Puerto Rico a path to growth, it could keep in place the bureaucrats who managed Prasa and other public corporations into default.
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