Obama Administration seeks bankruptcy for Puerto Rico financial crisis[/caption]
The financial crisis in Puerto Rico has attracted the attention of both Congress and the Obama White House. Treasury Secretary Jacob Lew has written to leaders in Congress urging them to pass a package of bailouts and bankruptcy protection for the Commonwealth of Puerto Rico. In that letter, Lew said legislation must be passed by Congress and signed by the president before the end of March to bailout Puerto Rico.
Congress will soon take up the question of whether nor not Puerto Rico and its state-run enterprises will be afforded bankruptcy protection under Chapter 9. Decades of corruption and cronyism in the government and agencies of the Commonwealth of Puerto Rice have lead the U.S. territory to financial crisis that has them demanding the remedy of bankruptcy. Congress can reject the call the for bankruptcy protection and send a clear message to Puerto Rico that they need to fix their government and financial system in order to fix the very causes of their current crisis.
“Although there are many ways this crisis could escalate further, it is clear that Puerto Rico is already in the midst of an economic collapse,” Lew wrote in the letter, “Puerto Rico is already in default. It is shifting funds from one creditor to pay another and has stop payment altogether of several of its debts. As predicted, creditors are filing lawsuits. The Government Development Bank, which provides critical banking and fiscal services to the central government, only avoided depleting its liquidity by halting lending activity and sweeping in additional deposits from other Puerto Rico governmental entities. A large debt payment of $400 million is due on May 1, and a broader set of payments are due at the end of June.”
Announcing they expect to be unable to pay about $1.13 billion in debt it owes between now and the end of June later this year, the largest electric provider in Puerto Rico, the state-run Puerto Rico Electric Power Authority (PREPA), is asking Congress to grant them bankruptcy protection under Chapter 9.
The debt crisis Puerto Rico faces gets worse and already, the Commonwealth has incurred more debt per capita than any of the 50 U.S. States. While Puerto Rico has incurred $15,637 per capita of debt, which is 10 times the average per capita debt of the 50 U.S. states, the public debt of the Commonwealth has reached 87.5 percent of personal income in 2013. This compares with the average of the 50 U.S. states, whose debt is 3.1 percent of personal debt. Puerto Rico’s debt is 26.8 percent of revenue, more than double Hawaii’s debt that is 13.0 percent of revenue. The Commonwealth’s debt is clearly reaching a level that may not be sustainable.
“To address the crisis, Puerto Rico needs federal legislation that pairs an orderly process to restructure its debts with strong, independent fiscal oversight to remedy its history of fiscal mismanagement. This combination is not new and has proven effective in other jurisdictions in the United States addressing financial crises like that facing Puerto Rico today. Federally legislated restructuring and oversight would cost taxpayers nothing and is essential to put Puerto Rico on a sustainable path forward,” Lew wrote.
Puerto Rico defaulted on bond payments on $73 billion of debt last week, Poltico reported. The Commonwealth failed to make a $37 billion payments, and announced it will rescinding $164 billion in payments already made. Several Congressional committees have held hearing on the issue, and the idea of granting bankruptcy protection to Puerto Rico, and Republican leaders including Speaker Paul Ryan are under pressure to passive legislation by the end of March to address the crisis in the Commonwealth.
Rep. Sean Duffy (R-WI) has introduced a bill to grant Chapter 9 bankruptcy protection, but members of the conservative-leaning House Freedom Caucus oppose this measure.
“At this time without a plan of fiscal solvency I don’t think there’s any way” conservatives would support Chapter 9 legislation, Rep. Raul Labrador (R-Idaho) told POLITICO. “They keep coming here and asking us for the opportunity to go into bankruptcy, but they haven’t shown that they’re actually willing to change the way they’re doing business.”
It is clear that Puerto Rico needs to implemented a comprehensive set of governmental and fiscal reforms to move forward, fix the root causes of the crisis, and grow their economy. The economy of Puerto Rico has been held back for decades by a fiscally irresponsible government that has rare balanced their budgets in the last 15 years, reliance on inefficient and corrupt state-run enterprises that have contributed greatly to the current financial crisis, and a system of regulations and permitting that sandbags business development.
Puerto Rico doesn’t need bankruptcy, that would only reward and enable the government’s big spending and corrupt ways, it needs reform. Only though reform will the Commonwealth bounce back from this crisis and realize economic prosperity. Congress needs to deny the request for bankruptcy and instead challenge the Commonwealth of Puerto Rico to reform their financial and governmental systems to bring about future prosperity.
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