CHICAGO - Puerto Rico's former governor said the U.S. needs to negotiate a "new economic relationship" with the commonwealth to help it avoid default on its $72 billion of debt.
"The clock is ticking and you have a crisis but you don't know it," said Anibal Acevedo Vila, speaking last week at the University of Chicago's Institute of Politics, an extracurricular program for students interested in politics founded by David Axelrod. "In one, two, three years, the Puerto Rican economy will collapse and it will be a political and economic crisis for us and for the U.S."
Acevedo Vila, who led the island from 2004 to 2008, wants a more independent commonwealth status that would preserve tools like bond interest tax exemption but give the island more independence so that it could, for example, opt out of labor laws that govern the rest of the U.S.
"[Current Gov. Alejandro Garcia] Padilla has done everything that Wall Street and the president have asked for, but we're still downgraded - because it's a structural issue," said Acevedo Vila, like Garcia Padilla a member of the Popular Democratic Party, which supports a pro-commonwealth position in contrast to the pro-statehood New Progressive Party.
The former governor also wants the U.S. to guarantee or outright buy at least some of Puerto Rico's bonds. Washington has more than just a political and economic interest in such a move, he said. The U.S. could also be legally on the hook for the bonds, a path that bondholders might pursue if the island defaults, he said.
"If we get to the point where we default, some of these hedge funds, well of course they will sue the government of Puerto Rico, but they might also sue the U.S. government, because you can't have your cake and eat it too."
Acevedo Vila cites a 2007 US Supreme Court case, Limtiaco, Attorney General of Guam v. Camacho, Governor of Guam -- http://www.scotusblog.com/movabletype/archives/06-116_all.pdf -- to back up his argument that the U.S. might have some legal responsibility for the debt.
The court ruled that a dispute over Guam's bond debt was not purely a local matter and was the concern of the U.S. as a territorial insolvency would also have national consequences.
He also says Puerto Rico issued its bonds "not on some weird market, but the most regulated market in the world" - the U.S. muni market - and that the triple tax exemption makes Puerto Rico bonds more attractive than any others.
"It's our debt and I have no problem with that - I was governor at the time and I take responsibility for that, but the U.S. has responsibility too," Acevedo Vila said. "I'm raising this argument because I want to raise awareness in the U.S. that this is not a local issue. To solve the problem of Puerto Rico, the U.S. must be part of the solution." In return for the U.S. backing some of the island's debt and giving it some other economic tools, the island would promise not to ask for any new transfers of federal funds, said Acevedo Vila.
"This would be a good deal for the U.S., but nobody listens," he said. "Washington's whole position is that it's your problem, and if we help you we'll have to help Detroit, Chicago, Illinois," he said. "Our response is: there is no precedent because we don't want to be a state."
He is pushing for a coalition of people similar to the group that is now urging federal legislators to pass HR 870, a bill that would allow the island's municipalities and public agencies file for bankruptcy. They include bondholders, companies like Eli Lily that have a big presence on the island, unions and local officials. "We should tell them if we don't fix this, your investment in Puerto Rico is going to mean nothing in one or two years," he said.
A powerful coalition could force Washington to come to the table for negotiations, he said.
"If that happened, we might have a chance," said Acevedo Vila. "But what I think is going to happen is that it's going to get worse and Congress is going to treat Puerto Rico like a traditional territory and protect the bondholders. They are going to set up a [financial emergency] board like the one that ran D.C. and think only of the bondholders."
Acevedo Vila lost his bid for a second term in 2008 just months after he was indicted on 24 counts of campaign finance violations. A judge dismissed 15 of the counts and he was later acquitted of the rest of the charges.
