Puerto Rico’s government is at serious risk of defaulting on its debt. If that happens, the ball will be in the court of the U.S. Congress to decide whether and how to bail it out. This matters not just to the people of Puerto Rico; it has serious implications for the U.S. economy and our commitment to ensure our local governments live up to the rule of law.
That Puerto Rico is in trouble is beyond dispute. Its gross domestic product is 13 percent smaller than it was 10 years ago, with its economy contracting and business investment, including direct foreign investment, plummeting. Its bonds are junk bond status today, just behind Argentina in terms of likelihood of a sovereign debt default. Its unemployment rate is double that of the rest of the U.S. and the government has begun closing schools.
The island’s government must take action to reverse its decade-long free fall — and it needs help from Washington.
Resident Commissioner Pedro R. Pierluisi, the non-voting resident Puerto Rican commissioner in the House of Representatives, is pushing to change the U.S. Bankruptcy Code to let Puerto Rican agencies seek court protection from creditors, just as cities such as Detroit did when they were unable to meet financial obligations. He wants public agencies and instrumentalities in Puerto Rico to also be able to file under Chapter 9, the section of the law that covers municipalities.
Certainly, Puerto Rico deserves the same protections as the rest of the United States. But U.S. taxpayers deserve to be sure their investment will be well spent. That means in order to receive help from Washington, Governor Alejandro Garcia Padilla, elected just last year, must take steps to once again uphold property rights, the rule of law, contractual rights and the rights of investors and creditors.
The key to reversing the island’s precipitous economic decline is clear — more responsible government decisions and attracting foreign and U.S. investment by restoring and bolstering the confidence of investors in Puerto Rico as a place to invest. Yet, in recent years, the opposite has been happening.
One of the most troubling decisions involves Doral Bank, one of the Commonwealth’s key financial institutions. Rather than live up to its contractual agreements to provide Doral the tax credits that the commonwealth repeatedly acknowledged it is owed, the administration of Garcia Padilla has unilaterally abrogated those agreements. Violating such agreements will certainly deter the very investors the commonwealth needs — they must know that the government where they invest will honor its own contracts and keep its word.
If that is not troubling enough, Padilla signed a new bankruptcy law that threatens to plunge the island into deeper turmoil. The bankruptcy law has precipitated a downgrade in the commonwealth’s bonds to junk status and abrogates the rights of creditors, including investors of the Puerto Rico Electric Power Authority. Many of these investors are increasingly concerned that the island’s leaders have set the stage for the power authority to begin defaulting on payments on its nearly $9 billion in debt, a situation that could lead to a larger crisis on the island, including the lights literally being turned off.
Rather than making life miserable for those who have invested in Puerto Rico, its leadership should change course and seek to make Puerto Rico a gateway to the U.S. With the right rules and protections for foreign investment, the government can attract companies to the island looking for a home to employ a well educated population, close to the mainland. Puerto Rico has it all — except a government willing to create these conditions.
What Puerto Rico needs is common sense reforms and leadership that will lead to a sustained investment strategy that will modernize its economy and bring jobs and growth backing to the island. The administration and Congress are prepared to provide appropriate assistance, but only if the will to reform is evident in Puerto Rico. It is up to the government of Puerto Rico to demonstrate that it is.
Nancy Soderberg is a former deputy national security adviser and ambassador to the United Nations under President Bill Clinton.