Wednesday, October 14, 2015

Treasury Considers Plan to Help Puerto Rico

Puerto Rico is currently in extreme debt (~$72 billion) and fiscal chaos. The United States Treasury Department has been talking about aiding Puerto Rico with a type of debt exchange assisted by the federal government, known as a "superbond." Because Puerto Rico has been having difficulty collecting taxes, the plan proposes that the federal government help them collect and account for local tax revenues. These proceeds would be overseen by the Treasury and then paid out to holders of the new bonds that Puerto Rico would issue in the exchange. This would make these bonds more attractive to creditors.

It seems like a good idea in theory, but there are a lot of issues that could arise. It is unlikely that Puerto Ricans would agree to pay the US government if they won't even pay their own. Furthermore, the Treasury's involvement could change the motives of the creditors. If the plan causes a loss for them, they might sue and rebel.

Instead of this plan, Puerto Rico wants a bankruptcy law amendment that would send some of their government agencies into Chapter 9 municipal bankruptcy court (explained here: Chapter 9 municipal bankruptcy). There have been no moves to follow through with this law amendment.

Because Puerto Rico is only a US territory, they do not have a vote in Congress, but Puerto Ricans are considered natural born US citizens. They have their own local constitution and elect a governor. This reminds me of past conflicts about US foreign (although Puerto Rico is a US territory) policy and debt crises. This also goes all the way back to APUSH and the Northwest Ordinance of 1787 which addressed how states should join the union. Would admitting Puerto Rico as a state help the debt issue or make it worse?

What do you think the US should do? Does the US have an obligation to help to the best of their ability because Puerto Rico is a US territory? How far does the power of the US extend/should extend? Should we follow through with the debt exchange plan or is this too risky and cause Puerto Ricans to rebel? What can they do to prevent tax evasion?

NY Times
The Wall Street Journal

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