Puerto Rico is close to showing investors in the $3.7 trillion U.S. municipal bond market for the first time since the Great Depression how confusing, frustrating, and enervating life can become if a major borrower defaults and no single authority — like a federal bankruptcy court — is there to help work out claims and allow officials to get back to the business of governing.
With Puerto Rico, like all 50 U.S. states,
It took eight years and a federal bailout to fully resolve the
While the legal fight over Puerto Rico's Recovery Act heats up, Pedro Pierluisi, the territory's non-voting representative to Congress, has proposed changing the U.S. Bankruptcy Code to permit the Commonwealth's "public agencies and instrumentalities" to file for federal court protection from creditors. But Puerto Ricans should not expect much sympathy from lawmakers for this request — or anything smacking of a federal bailout.
"Puerto Rico's bond market struggles expose the power of its triple tax-exempt status and the extent to which investors have ignored otherwise troubling financial practices," Municipal Market Advisors wrote in a research note July 7. "This will not be well-regarded in Congress, particularly by Republican anti-debt Tea Party representatives" who likely will cite "the island's use of a rich subsidy for precisely the wrong reasons."
With federal debt relief or restructuring assistance to Puerto Rico unlikely in the immediate future, investors who eagerly bought its government corporations' debt for years had better be prepared to hunker down for a long, anxious wait should defaults occur. In the future, lenders to high-risk states and territories ineligible for U.S. bankruptcy court protection may want to insist on the same kinds of formal default-resolution frameworks and independent monitoring that international banks and governments have imposed on riskier sovereign nations as a precondition for gaining access to their credit.
That's an imperfect solution at best, as it likely wouldn't be able to accomplish what a bankruptcy judge can do, such as supervise the resolution of government workers' claims for pensions and retirement benefits or address how officials can maintain vital public services. After Arkansas defaulted in 1933, "for years, infrastructure updates were all but forgotten,"
William Glasgall is State and Local program and editorial director at the Volcker Alliance in New York.