The Puerto Rico debt crisis has dramatically worsened over the last few years. With 45% of the population living in poverty, and an 11.6% unemployment rate, more than 300,000 people have left the commonwealth over the past decade, including 84,000 people in 2014. The government was forced to take extraordinary measures to make its latest bond payments, but everyone agrees it’s running out of cash to fund even vital public services.
In this article, we’ll take a look at the Obama administration’s Roadmap for Congressional Action as one potential solution to the debt crisis.
White House Plan
The White House wants to pass a law that would permit Puerto Rico municipalities to declare bankruptcy, which would mirror the rights cities have in the United States. But unlike bankruptcy laws in the U.S., the administration urged lawmakers to extend bankruptcy protection to the commonwealth itself. The new framework would be reserved for U.S. territories, and states would remain ineligible to file for bankruptcy.
In addition to legal changes, the Obama administration proposed a number of other solutions to address the commonwealth’s problems on a deeper level, including:
- Fiscal oversight: The administration urged Congress to provide independent fiscal oversight to give safeguards to ensure the island adheres to its plan and fully implements proposed reforms.
- Medicaid reform: The administration urged Congress to reform the commonwealth’s Medicaid program to increase access to coverage, raise the standard of care and prevent Medicaid’s unsustainable financing.
- Growth stimulus: The administration urged Congress to enact proven tools for stimulating growth, including an Earned Income Tax Credit and an expanded Child Tax Credit to increase labor-force participation.
The White House was careful to note that bankruptcy protection is not a federal bailout, and resolving its liabilities under the supervision of a bankruptcy court involves no federal financial assistance. With more than 20 creditor committees already formed around 18 different debt issuers, the commonwealth will have a tough time negotiating a voluntary restructuring on a timely basis without a bankruptcy court making decisive decisions.
Impact on the Market
The White House plan to restructure Puerto Rico’s debt could have enormous implications for the municipal bond market.
Critics of the White House proposal question whether or not the retroactive law change would be legal, and argue that bondholders who are forced to take haircuts may have a strong legal argument in their favor. In addition, the deal could disrupt the domestic muni bond market by raising the costs of borrowing for states and municipalities across the country, according to The Main Street Bondholders Coalition.
Supporters insist the austerity measures demanded by muni bond holders will only exacerbate the island’s economic woes and could create a humanitarian crisis. In the past, countries that have defaulted on their sovereign debts have successfully reentered the bond market over relatively short periods of time without any issues. Countries such as Greece, on the other hand, continue to struggle economically with austerity measures in place.
The Bottom Line
The White House proposal calls for legal changes to provide Puerto Rico with bankruptcy protection along with a number of other reforms. Supporters believe these changes will leave the commonwealth in a much stronger position to grow, while critics argue it could set a dangerous precedent for the municipal bond market and cause legal trouble down the road.