Puerto Rico is a mess. There’s growing support for a federal control board to step in and clean it up.
The solution worked for Washington D.C. in the 1990s and New York City in the 1970s.
Puerto Rico’s economy is tanking, its population has dwindled by 440,000 in the past decade and its debt bill tops $70 billion. The island gets compared often to Greece and Detroit.
Governor Alejandro Garcia Padilla claims the island is in a “death spiral” and there’s no way it will ever have enough money to pay all the debt back.
Bondholders disagree. They say the money is there but it’s being spent on the wrong things, pointing at the island’s 78 mayors (1 for every 45,000 people) and billions in potential savings as evidence.
The two sides concur on little, except this: Puerto Rico doesn’t need a government bailout.
To get out of its crisis, Puerto Rico will likely need legal — not financial — help from Congress.
Crisis of confidence
“The No. 1 issue here is a complete loss of credibility. Puerto Rico has no credibility. Not just with the financial markets, but anywhere,” says former Governor Luis Fortuno, who is now a lawyer in Washington D.C.
Current Governor Garcia Padilla, who aligns with Democrats, and former Governor Fortuno, who aligns with Republicans, believe the best solution for Puerto Rico is Chapter 9 bankruptcy. That’s also what President Obama’s team wants. But it would take congressional approval, which is highly unlikely.
Calls are increasing for an “option B” that looks something like a federal financial control board. Think of it like a trusted uncle coming to town to watch as a troubled household finds a way out of its mess and restores confidence.
Fortuno now advocates for a federal control board when he briefs 2016 Republican presidential candidates on the crisis.
Many bondholders and island residents favor a control board too.
“I see a control board as a good idea. It can do the work that the government doesn’t know how to do or have the willingness to do,” says Joaquin Garcia de la Noceda, a locksmith on the island who has lost thousands on his investment in Puerto Rican bonds.
What are the real numbers?
The idea is to have a trusted third party look at the island’s finances and come up with a plan — to find a solution for its massive debt and also to help Puerto Rico climb out of its nearly 10 years of economic contraction.
“You go to Puerto Rico and the people are very nice. The island is very beautiful, but you see the financials and you get concerned immediately,” says Phil Fischer, head of municipal bond research department for Bank of America Merrill Lynch.
Step 1 is getting reliable financial information from the government. Fischer says Puerto Rico is over 285 days late on its 2014 audit (there’s finally a draft of the audit, but the process still isn’t complete). Without the “real numbers,” bondholders say they won’t negotiate.
There are a lot of people who own Puerto Rican debt — from New York hedge funds trying to profit off the duress to grandmas and grandpas who put their life savings into what they believed were safe AAA-rated bonds. Getting all these parties to agree will be tough.
House Speaker Paul Ryan has promised to take some action to aid Puerto Rico by the end of March. That deadline is fast approaching.