Yesterday, Puerto Rico defaulted on over $400 million of debt payments. And Puerto Rico faces substantially higher required debt payments in coming weeks and months. The crisis has had serious economic consequences for Puerto Ricans. It also threatens people spread far beyond the island’s shores – including investors in the territory’s bonds.
Interested parties have flocked to Washington D.C., which is pretty much modus operandi for financial crises. Negotiations have intensified in recent days, with the most intense pressures coming, as they always do, from well-organized interest groups. Citing (with varying degrees of sincerity) concerns about the plight of poor Puerto Ricans, some politicians are now making concerted efforts to develop what is variously called “restructuring,” “rescue,” or “bailout” legislation. Coincidentally, or not, this assistance can also help rescue wealthy investors in the debt that greased the wheels for the crisis.
Some of those arguing for federal action have bristled at the “bailout” word. And even Treasury Secretary Jacob Lew has actually framed the case for intervention in terms of avoiding a “bailout.” But on the other side of the coin, some argue that extraordinary federal intervention can effectively add federal capital to territory/bondholder relationships, raising the possibility of more explicit assistance down the road.
There’s no such thing as a free lunch. Any federal bailout money is going to have to come from somewhere. Puerto Rican citizens and investors in the territory's bonds aren’t the only ones threatened. US taxpayers in general are also exposed.
What can people in Illinois and other states in the US learn from the crisis in Puerto Rico? What role did less-than-truthful financial reporting play in seeding the crisis? Will the “lessons” include any incentives for state and local governments, and wealthy investors, to knock harder on Uncle Sam’s door for help?
We will be taking a closer look as things unfold this week.