Puerto Rico on the brink
Editor's note:Simon Johnson is a former chief economist of the IMF, a professor at the MIT Sloan School of Management, a senior fellow of the Peterson Institute for International Economics, the co-founder of a leading economics blog, The Baseline Scenario, and the co-author of "Jump-Starting America: How Breakthrough Science Can Revive the Economic Growth and the American Dream".The article reflects the author's opinion, and not necessarily the views of CGTN.
More than three million Americans, residents of the U.S. commonwealth of Puerto Rico, could be plunged into economic turmoil unless President Donald Trump's administration acts quickly.
Unfortunately, there is no sign that Trump is paying attention to the problem; he is distracted by other matters. And, because no one else has the authority or will to take action, a tragedy looms.
Puerto Rico borrowed too much money in the boom years and has struggled with an overwhelming debt burden over the past decade. When a company is in this situation, the outcome is some form of bankruptcy: the debt is restructured or the company is wound down.
A man waves the national flag of Puerto Rico during a protest march against austerity measures in San Juan, Puerto Rico, August 30, 2017. /VCG Photo
The same logic applies at some levels of government in the U.S., with court supervision of debt restructuring ensuring relatively orderly outcomes – invariably after a great deal of argument about debt levels and how to reduce payments to an affordable level.
But, because of Puerto Rico's particular legal status as a U.S. territory, it is not eligible for any kind of standard court-run debt restructuring process.
Recognizing this, in 2016 Congress passed the PROMESA Act, which enabled a form of court-supervised bankruptcy, along with an oversight board in charge of monitoring and approving fiscal plans in Puerto Rico.
This was a pragmatic political compromise worked out by the U.S. Treasury and congressional Republicans and Democrats (I supported PROMESA at the time, including in congressional testimony).
But now this entire arrangement has been called into question by arecent court decisionthat invalidates the legal authority of the oversight board. At issue is a purely procedural issue – whether the board was appointed properly as specified in the legislation, or whether its members should have gone through a Senate confirmation process.
A man cuts a tree uprooted by hurricane Maria in Yabucoa, east Puerto Rico, September 28, 2017. /VCG Photo
The main plaintiff is a hedge fund that is not happy with the current arrangement. But, as David Skeel, a highly respected bankruptcy expert and member of the oversight board, notes in arecent commentary, "Puerto Rico would collapse into chaos if the ruling took immediate effect."
Skeel is not exaggerating. If the oversight board is deemed unconstitutional, the most likely result will be the collapse of the court-run process and a mad scramble by all of Puerto Rico's crEditors to seize its assets in any way they can. As a result, it would be very hard for any local government to operate. Supplies of essential goods, including fuel, could well be disrupted. The ability to generate electrical power on the island could also be jeopardized.
The precise legal situation remains in flux. One court has determined that the board is unconstitutional, but granted 90 days for board members to be appointed (in its view) appropriately. Another court, hearing a different case, hasupheldthe board's appointment. The Supreme Court may or may not get involved.
This is a mess with an easy solution. Trump could immediately nominate, and the Senate could confirm, the current oversight board members, or, as Skeel points out, a new set of board members could be chosen. Such a process normally takes many months (or longer), but in this instance, there is a strong case for expeditious action.
U.S. President Donald Trump visits locals to inspect relief efforts after devastating hurricane Maria in Guaynabo, Puerto Rico, October 3, 2017. /VCG Photo
Sadly, there is no sign that the Trump administration is taking the situation seriously. After hurricane Maria hit Puerto Rico in 2017, Trump made a show of delivering aid, but the reality was that the island received too little assistance – and too late – to make a difference for many people. The death toll from the hurricane was significantly understated by the administration for far too long.
More recently, Trump has even talked ofdiverting fundsfrom rebuilding Puerto Rico to constructing his pet project – a wall on the U.S.-Mexican border. The legality of this has been challenged, but, given the suffering and continued vulnerability of Puerto Rico's people, it is shocking that Trump would even consider such a move.
Trump's cynical and cruel calculus is, however, understandable. Although Puerto Rico's people are U.S. citizens, the island is not a state, and therefore has no representation in the Senate and only one representative (with limited voting rights) in the House. This lack of political voice in Washington has hurt for a long time – and now threatens to destroy Puerto Rico's prospects for economic recovery.
Puerto Rico needs a lot more than just debt restructuring. The island has substantial economic potential, but realizing it requires putting essential public services like education and health care back on their feet. To do that, the payments due on the outstanding government debt need to be reduced – and in a way that does not involve a mad scramble by crEditors to seize assets.
The Trump administration needs to pay attention before it's too late.
(Cover: Demonstrators protest outside Trump Tower demanding enhanced financial support for hurricane-ravaged Puerto Rico in New York City, U.S., October 3, 2017. /VCG Photo)
Copyright:, 2019.
(If you want to contribute and have specific expertise, please contact us at opinions@cgtn.com.)
