3 thoughts on “POLICY OPTIONS BRIEF: Puerto Rican Debt Crisis”
I enjoyed reading this paper. Is the case for the seriousness of the problem sufficient? Yes, for the most part. I would try to give a bit more detail to explain how the average American can expect to be impacted if Puerto Rico determines that it cannot pay its debts. I did like the options presented, however you reference the Jones Act, it might help if you give a quick overview as to why/how did it cause “unfriendly economic conditions.”
Also it was mentioned that a majority of its debt could be classified as Municipal Debt, would it be possible to get an amount or proportion of what this majority is?
You raised a very important topic, we do not want an decision that belittles the islands residents and causes hostility.
Statehood seems like a good option but being Puerto Rican myself, I wonder what that does to the culture? If they extend the bankruptcy laws, that seems as if it could work, however you do raise the suggestion that companies may sue for the retroactive change. I’m still finding it difficult to come to a decision, I look forward to the presentation.
Hi Freddy,
Thank you for the comments. Some of this was addressed in the Problem Memo portion and seemed redundant. I may or may not have mentioned, but my husband is Perto Rican (raised on the island in Adjuntas, undergrad at UPR Mayagüez). It is part of the reason I am interested in the relationship between the States and the Commonwealth. I just finished reading a book called “The War Against All Puerto Rican’s” which outlines, in quite a bit of detail, the atrocities, both physical (the only time America has bombed its own Citizens was when the bombed Utuado and Jayuya during the Nationalist revolution in 1950, multiple massacres at the hand of the Insular Police, FBI and National Guard – Ponce, Mayagüez, San Juan, and several others) and economic. I come to the conclusion that as much as the Federal Government wants to say this is the island’s problem, the problems are, I contend, more a result of the vicious actions of the Federal Government and its Colonial aspirations. It amazes me that a country that was founded on a colonial revolt has attempted, successfully, for the past 117 years to oppress its colonial possessions in much the same way the British did 240 years ago.
Panel response on The Puerto Rican Debt Crisis
Policy Options Brief & Presentation
As it was correctly explained by the presenters, Puerto Rico’s debt situation has become unsustainable and must be dealt with certain urgency, especially when prior unilateral attempts by the island to decrease the debt have obviously failed. However, the complex roots of the issue and the unpredictability of any course of action have been major obstacles that prevent this panel from making a confident recommendation.
The panel members do agree that Puerto Rico and the United States must engage in consistent dialogue and work towards a bilateral solution. It is important to consider that any proposed solution will carry substantial risks as well as benefits, and that a drafted agreement will also include an important trade off for all the parties involved. In other words, structural problems like this cannot be solved, unless everyone participating in the process accepts to sacrifice a part of their interest.
Since the panel was not able to craft a single recommendation, its members thought it would be appropriate to explain their individual opinions on the matter. Hence, below are listed the three summarized opinions:
Individual Panel Members Opinions
Freddy Leon
Upon deliberation with my colleagues, I have decided to form a separate opinion on this matter. It has been made clear that the economic problems facing Puerto Rico are of importance not only to the island but to the United States as well. The policies closing argument in relation to cultural loss particularly touched me. I see a bilateral approach as absolutely necessary. A bilateral approach must ensure that Puerto Rico receives limited autonomy yet strengthens its economic situation. It is clear that Puerto Rico is heavily dependent on the US, any attempt to allow it complete autonomy would cause more harm than good, particularly for the island.
The presentation and policy brief explored the option of Puerto Rico being granted access to an extension of Chapter 9 Municipal Bankruptcy. I would need a bit more information as the the reasons why it currently faces opposition by the House and Senate. It was mentioned that the United States could be sued as a result of retroactively extending the bankruptcy laws, is this the only reason not allowing this option to move forward?
Another topic mentioned was reforming taxes. Generating tax revenues from its high income workers and self employed/ underground economy must also be included in any plan which hopes to rectify the situation. While it was presented that the tax revenue from this area would not be significant, it is necessary in demonstrating that the island is doing all that it can to get out of its current situation. Any increase to wealthy residents must be carefully evaluated as to not promote emigration, therefore any tax increase should be minimal.
An area that wasn’t really examined was the impact of Medicaid and Medicare cuts to the island. Outside research shows that “$25 billion of Puerto Rico’s $73 billion debt is the result of its government being forced to borrow to keep its Medicaid program afloat.”(NYTIMES.com) This issue has gained the attention of the Centers for Medicare and Medicaid Services as they have reported that they are working weekly with the island and all stakeholders to find solutions.
Ultimately I feel that it is important to keep the island’s designation as a Commonwealth while altering the current protections and rights extended to having Commonwealth status. The United States must reevaluate how it treats its territories to ensure that it demonstrates that it is a fair and just nation. Puerto Rico must also do its part in owning up to responsibility where fault lies. It is imperative that a joint commission be set up to reach decisions that will affect both the United States mainland and the island. A joint commision is necessary to avoid any hostility or belittling that could be derived from a commission that is seen as only representing the interests of the United States.
2. Christopher Williams
Although I am sensitive to the concerns that a default by Puerto Rico will have a tremendous impact on both the Commonwealth and its people as well as international (and American) bond-holders, it is unclear to me how any of the options put forth will solve the issues that are likely going to arise. Each of the options proposed has significant risks associated with it, some of which are potentially more damaging than allowing Puerto Rico to default on its debt (ie, doing nothing). Some of the concerns that might arise are outlined below:
Independence. This option would only “work” if the newly formed independent country of Puerto Rico were absolved of its debt obligations. For this to happen, one of two things would have to happen: holders of Puerto Rican debt would have to accept a 100% loss on their remaining holdings, or, some other nation, presumably the United States, would have to voluntarily agree to pay this debt. These scenarios are so unlikely to occur that this should not really be considered an option. Puerto Rico could choose to become independent for other reasons but this would not get rid of its debt.
Managed Default. This option may be appealing to US holders of Puerto Rican debt but if the US Federal Government is going to accept even partial responsibility for this debt, it is likely to come at a tremendous cost to Puerto Rican sovereignty. The US would almost certainly implement some kind of governing task force in San Juan responsible for ensuring the implementation of austerity measures. Given the colonialist tendencies of the US, any consideration of this option should be done with caution.
Tax Reform. This will likely be a requirement in the event that the US or an entity like the IMF get involved in managing Puerto Rico’s national finances (which would likely be the case in a managed default or bailout situation). From a good governance perspective, a serious attempt at tax reform should likely be implemented regardless, however, it should be noted that this initiative would not bring in enough revenues in time to have an effect on the current situation.
Statehood. Although this measure would ensure that Puerto Rico is legally eligible for Chapter 9 municipal bankruptcy, it should be noted that a) municipal bankruptcy is still an expensive proposition as creditors could theoretically make claims to various state assets and b) statehood would come at a cost to Puerto Rico’s sovereignty. What this means in practice is difficult to say, but it is not difficult to imagine that affordable neighborhoods are quickly bought up and populated by Florida real estate developers and then populated by hipsters.
Extend Chapter 9 Municipal Bankruptcy. Again, declaring bankruptcy would not completely free Puerto Rico from its obligation to creditors. Puerto Rico’s books would be audited by a bankruptcy court and national assets could be declared eligible collateral. This route would also likely result in a loss of national sovereignty as the bankruptcy proceedings would probably be managed by a special task force appointed in DC.
Fiscal Bailout. Some version of this may very well happen but it is unclear how this would be anything but detrimental to the Puerto Rican people. Again, Puerto Rico would be forced to accept an IMF-style austerity regimine and would therefore have to accept a loss of sovereignty. Crucial government services could face mandatory budget cuts which would negatively affect the economy and tax revenue, further exacerbating the debt problem. Given the US government’s recent preferential treatment of large financial institutions, it would not come as surprise if this route is taken.
Reenact and Restructure the 936 Tax Credit. This may have some political appeal within Puerto Rico but it is again unclear how beneficial this would be in the current debt crisis. Tax revenues gained from increased employment would not be enough to cover Puerto Rico’s debt servicing cost and there is no guarantee that, even if implemented correctly, the tax credit would stimulate jobs in the near term. From a manufacturing perspective, Puerto Rico would be competing with lower income manufacturing nations from across the world. This competition tends to drive wages down which suggests that tax receipts may only increase modestly’
Because it is difficult to predict how the economy of Puerto Rico or the bond market might react in any of these scenarios, it is impossible to conduct a full cost benefit analysis. US policymakers will almost certainly be forced to take some form of unprecedented action, regardless of whether the citizens of Puerto Rico and the US Congress decide to pursue statehood as an option.
3. Federico Zanatta
Viewing this issue strictly from an economical perspective, Puerto Rico must decide between becoming an independent nation or joining the United States as its 51st state. Considering that in this case, there seems to be no legal precedent to predict impact of a proposed solution and that the panel members are no experts on the matter, one is forced to only hypothesise possible solutions.
A solution, as stated before, would be for Puerto Rico to declare independence. However, it is difficult to get behind this plan due to the historical relationship between the U.S. and the Island. If Puerto Rico became a nation, it is likely that it will be a failed country. I say this with confidence because of the fact that Puerto Rico would have to create a new currency, undergo a long political transformation, deal with the population loss on its own, incur new debt to transform its infrastructure, negotiate new international treaties, etc. In addition, the new nation would have to cope with the current failed financial and governmental structure described in the presentation. Therefore, I argue that Puerto Rico, because of its current situation, is not in a position to positively deal with such a transformation.
On the other hand, as difficult as it is, it seems viable that Puerto Rico could become the 51st State of the Union, which would allow for it to undergo reforms with both external pressure and support. During the presentation, it was explained that the major obstacle for this outcome is a political one. Hence, I envision that a way to avert the financial crisis would be a long term, bilateral agreement that would direct both entities towards Puerto Rico’s statehood.
The United States obviously has a strategic interest in keeping Puerto Rico. Furthermore, national investments create an additional incentive to avoid a financial crash in the markets. At the same time, Puerto Rico desperately needs financial support and a structural reform. Finally, both parties would benefit from a long term solution, as opposed to a temporary one that will not repair the failed systems that exist today.
Given the current political environment in Congress and at the different local legislatures in Puerto Rico and around the country, the only possible solution I see would be an agreement that could be executed in the next two to three decades, and this way eliminating the present political pressures. Under such a plan, the Island and the United States would agree to the following: A. the U.S. would provide for a partial bailout of the current debt and would also grant bankruptcy rights to PR’s municipalities and utilities; B. in exchange, Puerto Rico would too accept responsibility over part of the debt and would undergo major government reforms under the guidance of a committee appointed by the Island’s Legislature and the Governor, and Congress and President of the United States. This committee would work under an agreement to incorporate Puerto Rico as a State of the Union after a long period of reforms that would progressively give the Island the benefits of such political entity. For instance, they could a gree to incorporate the new state in 2030, when the major political players are long gone from their posts.
I believe this is the only long term solution that would maintain the already existing benefits Puerto Ricans enjoy, while periodically expanding them and giving the new state an real opportunity to thrive. Finally, the people of Puerto Rico would be able to have an actual voice in Congress that truly represents them, as opposed to the current fictional representation of a territory that the United States does not take seriously.
I enjoyed reading this paper. Is the case for the seriousness of the problem sufficient? Yes, for the most part. I would try to give a bit more detail to explain how the average American can expect to be impacted if Puerto Rico determines that it cannot pay its debts. I did like the options presented, however you reference the Jones Act, it might help if you give a quick overview as to why/how did it cause “unfriendly economic conditions.”
Also it was mentioned that a majority of its debt could be classified as Municipal Debt, would it be possible to get an amount or proportion of what this majority is?
You raised a very important topic, we do not want an decision that belittles the islands residents and causes hostility.
Statehood seems like a good option but being Puerto Rican myself, I wonder what that does to the culture? If they extend the bankruptcy laws, that seems as if it could work, however you do raise the suggestion that companies may sue for the retroactive change. I’m still finding it difficult to come to a decision, I look forward to the presentation.
Hi Freddy,
Thank you for the comments. Some of this was addressed in the Problem Memo portion and seemed redundant. I may or may not have mentioned, but my husband is Perto Rican (raised on the island in Adjuntas, undergrad at UPR Mayagüez). It is part of the reason I am interested in the relationship between the States and the Commonwealth. I just finished reading a book called “The War Against All Puerto Rican’s” which outlines, in quite a bit of detail, the atrocities, both physical (the only time America has bombed its own Citizens was when the bombed Utuado and Jayuya during the Nationalist revolution in 1950, multiple massacres at the hand of the Insular Police, FBI and National Guard – Ponce, Mayagüez, San Juan, and several others) and economic. I come to the conclusion that as much as the Federal Government wants to say this is the island’s problem, the problems are, I contend, more a result of the vicious actions of the Federal Government and its Colonial aspirations. It amazes me that a country that was founded on a colonial revolt has attempted, successfully, for the past 117 years to oppress its colonial possessions in much the same way the British did 240 years ago.
Panel response on The Puerto Rican Debt Crisis
Policy Options Brief & Presentation
As it was correctly explained by the presenters, Puerto Rico’s debt situation has become unsustainable and must be dealt with certain urgency, especially when prior unilateral attempts by the island to decrease the debt have obviously failed. However, the complex roots of the issue and the unpredictability of any course of action have been major obstacles that prevent this panel from making a confident recommendation.
The panel members do agree that Puerto Rico and the United States must engage in consistent dialogue and work towards a bilateral solution. It is important to consider that any proposed solution will carry substantial risks as well as benefits, and that a drafted agreement will also include an important trade off for all the parties involved. In other words, structural problems like this cannot be solved, unless everyone participating in the process accepts to sacrifice a part of their interest.
Since the panel was not able to craft a single recommendation, its members thought it would be appropriate to explain their individual opinions on the matter. Hence, below are listed the three summarized opinions:
Individual Panel Members Opinions
Freddy Leon
Upon deliberation with my colleagues, I have decided to form a separate opinion on this matter. It has been made clear that the economic problems facing Puerto Rico are of importance not only to the island but to the United States as well. The policies closing argument in relation to cultural loss particularly touched me. I see a bilateral approach as absolutely necessary. A bilateral approach must ensure that Puerto Rico receives limited autonomy yet strengthens its economic situation. It is clear that Puerto Rico is heavily dependent on the US, any attempt to allow it complete autonomy would cause more harm than good, particularly for the island.
The presentation and policy brief explored the option of Puerto Rico being granted access to an extension of Chapter 9 Municipal Bankruptcy. I would need a bit more information as the the reasons why it currently faces opposition by the House and Senate. It was mentioned that the United States could be sued as a result of retroactively extending the bankruptcy laws, is this the only reason not allowing this option to move forward?
Another topic mentioned was reforming taxes. Generating tax revenues from its high income workers and self employed/ underground economy must also be included in any plan which hopes to rectify the situation. While it was presented that the tax revenue from this area would not be significant, it is necessary in demonstrating that the island is doing all that it can to get out of its current situation. Any increase to wealthy residents must be carefully evaluated as to not promote emigration, therefore any tax increase should be minimal.
An area that wasn’t really examined was the impact of Medicaid and Medicare cuts to the island. Outside research shows that “$25 billion of Puerto Rico’s $73 billion debt is the result of its government being forced to borrow to keep its Medicaid program afloat.”(NYTIMES.com) This issue has gained the attention of the Centers for Medicare and Medicaid Services as they have reported that they are working weekly with the island and all stakeholders to find solutions.
Ultimately I feel that it is important to keep the island’s designation as a Commonwealth while altering the current protections and rights extended to having Commonwealth status. The United States must reevaluate how it treats its territories to ensure that it demonstrates that it is a fair and just nation. Puerto Rico must also do its part in owning up to responsibility where fault lies. It is imperative that a joint commission be set up to reach decisions that will affect both the United States mainland and the island. A joint commision is necessary to avoid any hostility or belittling that could be derived from a commission that is seen as only representing the interests of the United States.
2. Christopher Williams
Although I am sensitive to the concerns that a default by Puerto Rico will have a tremendous impact on both the Commonwealth and its people as well as international (and American) bond-holders, it is unclear to me how any of the options put forth will solve the issues that are likely going to arise. Each of the options proposed has significant risks associated with it, some of which are potentially more damaging than allowing Puerto Rico to default on its debt (ie, doing nothing). Some of the concerns that might arise are outlined below:
Independence. This option would only “work” if the newly formed independent country of Puerto Rico were absolved of its debt obligations. For this to happen, one of two things would have to happen: holders of Puerto Rican debt would have to accept a 100% loss on their remaining holdings, or, some other nation, presumably the United States, would have to voluntarily agree to pay this debt. These scenarios are so unlikely to occur that this should not really be considered an option. Puerto Rico could choose to become independent for other reasons but this would not get rid of its debt.
Managed Default. This option may be appealing to US holders of Puerto Rican debt but if the US Federal Government is going to accept even partial responsibility for this debt, it is likely to come at a tremendous cost to Puerto Rican sovereignty. The US would almost certainly implement some kind of governing task force in San Juan responsible for ensuring the implementation of austerity measures. Given the colonialist tendencies of the US, any consideration of this option should be done with caution.
Tax Reform. This will likely be a requirement in the event that the US or an entity like the IMF get involved in managing Puerto Rico’s national finances (which would likely be the case in a managed default or bailout situation). From a good governance perspective, a serious attempt at tax reform should likely be implemented regardless, however, it should be noted that this initiative would not bring in enough revenues in time to have an effect on the current situation.
Statehood. Although this measure would ensure that Puerto Rico is legally eligible for Chapter 9 municipal bankruptcy, it should be noted that a) municipal bankruptcy is still an expensive proposition as creditors could theoretically make claims to various state assets and b) statehood would come at a cost to Puerto Rico’s sovereignty. What this means in practice is difficult to say, but it is not difficult to imagine that affordable neighborhoods are quickly bought up and populated by Florida real estate developers and then populated by hipsters.
Extend Chapter 9 Municipal Bankruptcy. Again, declaring bankruptcy would not completely free Puerto Rico from its obligation to creditors. Puerto Rico’s books would be audited by a bankruptcy court and national assets could be declared eligible collateral. This route would also likely result in a loss of national sovereignty as the bankruptcy proceedings would probably be managed by a special task force appointed in DC.
Fiscal Bailout. Some version of this may very well happen but it is unclear how this would be anything but detrimental to the Puerto Rican people. Again, Puerto Rico would be forced to accept an IMF-style austerity regimine and would therefore have to accept a loss of sovereignty. Crucial government services could face mandatory budget cuts which would negatively affect the economy and tax revenue, further exacerbating the debt problem. Given the US government’s recent preferential treatment of large financial institutions, it would not come as surprise if this route is taken.
Reenact and Restructure the 936 Tax Credit. This may have some political appeal within Puerto Rico but it is again unclear how beneficial this would be in the current debt crisis. Tax revenues gained from increased employment would not be enough to cover Puerto Rico’s debt servicing cost and there is no guarantee that, even if implemented correctly, the tax credit would stimulate jobs in the near term. From a manufacturing perspective, Puerto Rico would be competing with lower income manufacturing nations from across the world. This competition tends to drive wages down which suggests that tax receipts may only increase modestly’
Because it is difficult to predict how the economy of Puerto Rico or the bond market might react in any of these scenarios, it is impossible to conduct a full cost benefit analysis. US policymakers will almost certainly be forced to take some form of unprecedented action, regardless of whether the citizens of Puerto Rico and the US Congress decide to pursue statehood as an option.
3. Federico Zanatta
Viewing this issue strictly from an economical perspective, Puerto Rico must decide between becoming an independent nation or joining the United States as its 51st state. Considering that in this case, there seems to be no legal precedent to predict impact of a proposed solution and that the panel members are no experts on the matter, one is forced to only hypothesise possible solutions.
A solution, as stated before, would be for Puerto Rico to declare independence. However, it is difficult to get behind this plan due to the historical relationship between the U.S. and the Island. If Puerto Rico became a nation, it is likely that it will be a failed country. I say this with confidence because of the fact that Puerto Rico would have to create a new currency, undergo a long political transformation, deal with the population loss on its own, incur new debt to transform its infrastructure, negotiate new international treaties, etc. In addition, the new nation would have to cope with the current failed financial and governmental structure described in the presentation. Therefore, I argue that Puerto Rico, because of its current situation, is not in a position to positively deal with such a transformation.
On the other hand, as difficult as it is, it seems viable that Puerto Rico could become the 51st State of the Union, which would allow for it to undergo reforms with both external pressure and support. During the presentation, it was explained that the major obstacle for this outcome is a political one. Hence, I envision that a way to avert the financial crisis would be a long term, bilateral agreement that would direct both entities towards Puerto Rico’s statehood.
The United States obviously has a strategic interest in keeping Puerto Rico. Furthermore, national investments create an additional incentive to avoid a financial crash in the markets. At the same time, Puerto Rico desperately needs financial support and a structural reform. Finally, both parties would benefit from a long term solution, as opposed to a temporary one that will not repair the failed systems that exist today.
Given the current political environment in Congress and at the different local legislatures in Puerto Rico and around the country, the only possible solution I see would be an agreement that could be executed in the next two to three decades, and this way eliminating the present political pressures. Under such a plan, the Island and the United States would agree to the following: A. the U.S. would provide for a partial bailout of the current debt and would also grant bankruptcy rights to PR’s municipalities and utilities; B. in exchange, Puerto Rico would too accept responsibility over part of the debt and would undergo major government reforms under the guidance of a committee appointed by the Island’s Legislature and the Governor, and Congress and President of the United States. This committee would work under an agreement to incorporate Puerto Rico as a State of the Union after a long period of reforms that would progressively give the Island the benefits of such political entity. For instance, they could a gree to incorporate the new state in 2030, when the major political players are long gone from their posts.
I believe this is the only long term solution that would maintain the already existing benefits Puerto Ricans enjoy, while periodically expanding them and giving the new state an real opportunity to thrive. Finally, the people of Puerto Rico would be able to have an actual voice in Congress that truly represents them, as opposed to the current fictional representation of a territory that the United States does not take seriously.