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In our opinion: The chances of a legislative solution for Puerto Rico are growing slimmer

Bernie Sanders has become an ardent foe of the House rescue plan for Puerto Rico. His opposition could stall legislative efforts to provide relief before a large July 1 bond payment comes due.
Bernie Sanders has become an ardent foe of the House rescue plan for Puerto Rico. His opposition could stall legislative efforts to provide relief before a large July 1 bond payment comes due.
Composite photo, Associated Press

Whatever Congress decides to do about Puerto Rico’s fiscal crisis, it isn’t likely to happen soon enough to keep the island commonwealth from defaulting on $2 billion worth of general obligation bond payments that are due July 1. And the chances Congress will agree on a plan at all appear to be growing slimmer.

Among the reasons for this is Bernie Sanders, the Democratic senator from Vermont who is running for president. He has become an ardent foe of the House rescue plan sponsored by Utah Rep. Rob Bishop.

Sanders would give Puerto Rico bankruptcy protection, provide it with emergency loans and allocate billions for infrastructure improvements on the island, all in the name of providing jobs and economic development, and he could be a major impediment to quick passage of a solution.

All of these things are exactly the wrong prescription.

Congress is part of the reason Puerto Rico got itself into trouble in the first place. Decades ago, it approved tax breaks to spur investments in manufacturing and pharmaceutical businesses on the island. This artificial prop lasted until the tax breaks ended completely in 2006. Then the businesses began to leave and unemployment began to rise. Tax revenues no longer were enough to cover the government’s obligations.

Rather than dealing with this problem head-on, local leaders began issuing general obligation bonds to cover debt payments, exacerbating the problem. Now that debt equals $70 billion, and the commonwealth no longer can borrow to cover its obligations.

The island’s tactics may have been in violation of Puerto Rico’s constitution, which prohibits borrowing to finance a deficit. A recent report by a commission created to audit Puerto Rico’s debt also said the island has spent more of its revenue on debt than the constitution allows.

Allowing the island to declare bankruptcy could have long-term implications for investment in Puerto Rico, making future economic development difficult. Investors find general obligation bonds attractive because they are tax-exempt and pose little risk because of the implied guarantee the government will stand behind them. Bankruptcy would harm investor confidence.

Already, the commonwealth has begun negotiating with bondholders and insurance companies to relieve some of its obligations. New Puerto Rican bonds are trading at much higher interest rates than before, accounting for the expectation they might not be repaid on time. Even without any further misguided efforts by Congress, Puerto Rico’s economy will suffer from market realities that cannot be escaped.

In the rest of the United States, any overly generous solution to Puerto Rico’s troubles might embolden cities and other local governments facing their own fiscal troubles. They may demand similar treatment.

Bishop’s bill would set up a federal oversight board, made up of appointees by Congress and the White House, to settle issues with creditors on a case-by-case basis. It also would have power to force the island’s government to adopt austerity measures and fiscal reforms needed to stabilize the economy.

Even this solution is tricky on an island where many people resent the perception the United States treats the commonwealth as a colony. But the United States must help Puerto Rico deal with its problems in an orderly way that would protect bondholders as well as pensioners.

This can’t be done without pain, but it’s best to experience that pain in a way that leads to a quicker recovery after a while, rather than in a way that drags out the island’s problems and makes it harder to restore investor confidence.