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DAVID KRUSE

By Staff | May 13, 2016

Puerto Rico is a U.S. territory and the people living there are U.S. citizens. They were granted statutory citizenship by a law signed by Woodrow Wilson in 1917, so are governed by the same Congress that we are.

Puerto Rico is $70 billion in debt and needs Donald Trump, who has had experience negotiating a bankruptcy away, to step up for it. There is no way that it can pay this debt.

Puerto Rico recently missed a $370 million payment on May 1 and it has $2 billion in payments due this summer that it will not be able to make either.

This is poor timing as Congress is afraid that any help given to Puerto Rico will be called a bailout even if it isn’t in an election year. House Speaker Paul Ryan is trying to rise above it all to craft a solution, but he is working with politicians more interested in their political prospects.

Is Puerto Rico a bunch of deadbeats just looking to fleece little old ladies who have invested their retirement savings in Puerto Rican bonds? That is what the TV commercials in the ad campaign financed by hedge funds who bought the bonds would like us to think.

They are using a nice little old lady purported to have her life savings in Puerto Ricans bonds as their poster child hoping for sympathy. They bought the bonds from someone else who didn’t think Puerto Rico could pay. Why don’t they give her something for hers? The bonds were trading 65 cents on the dollar before the default.

Puerto Rico is probably no bigger deadbeat than the state of Illinois who was paying its lottery winners IOUs not too long ago.

The difference is that Illinois can go as bankrupt as Detroit did; but a quirk placed into the law put there by Sen. Strom Thurmond in 1984 denies Puerto Rico the right as a territory to file bankruptcy.

Puerto Rico had the right to file Chapter 9 up until 1984. No one knows why the provision eliminating that process was enacted. Puerto Rico also was obliged in the bonds sold to put interest payments ahead of government services such as running hospitals, schools, and paying for police cars, but it is not abiding by that provision.

A hospital was allowed to finish surgeries before they shut the power off for an unpaid bill.

How did Puerto Rico get here? Congress helped a lot. First, it gave Puerto Rico special tax breaks in the 1970s which caused business to boom there as the island became a pharmaceutical company haven.

That was like hitting oil and the island economy flourished. They borrowed against future profits with bond holders being offered triple tax exemptions. Then Congress in its omnipotence took away the tax breaks and the economy deflated faster than it had boomed.

There was a dramatic exodus from the island as nearly 10 percent of the population has left since 2005 that took the tax base with it leaving the territory with its bond debt now held by little old ladies and hedge funds with no ability to walk away from the debt.

They were not asking for $billions in a U.S. taxpayer bailout, but for relief in the ability to re-negotiate the debt that it cannot pay.

The U.S. Congress made them and then the U.S. Congress broke them.

Yes, they willingly went along for the ride, but that is why bondholders got big interest payments to cover their risk. Now they are back at Congress asking for the right to negotiate their debt similar to state’s rights. They need some mechanism to re-negotiate their debt from Congress.

Throw in the Zika virus and the Puerto Rican tourist economy will now take a hit cancelling out its last good, remaining revenue stream. There is no way for them to make these bond payments. Defaults will just turn the recession into a cascading event.

While it doesn’t snow in Puerto Rico the debt crisis will snowball from defaults to where re-negotiation is no longer even plausible. Bondholders who would now get something from re-negotiation may end up with nothing. Maybe they can just leave the keys to the island on the table for debtors and move to the Bahamas?

As noted, they are Americans so they are legally immigrating back to the mainland.

Paul Ryan wants to govern, which means that he wants Congress to act. His plan is to create a federal oversight board with the power to approve or reject local budgets while allowing a court supervised debt restructuring that would not include any taxpayer funds.

Conservatives, however, feel no obligation to intervene, there is little risk of the defaults on Puerto Rican bonds bleeding into the larger market and few in Congress have constituents that care.

If Puerto Rico was a country the IMF could help. Ryan said that he wants to bring order from chaos without stiffing U.S. taxpayers with a bill. The Obama administration says the plan falls short as creditors can’t be made to make concessions. Those that don’t like Ryan’s solution don’t appear to have one of their own.

Typically the faster one tackles a financial crisis the smaller it is and the more limited the cost. It really doesn’t matter whose fault that it was at this point. The objective should be to contain it.

This crisis is not going away and the bill that could have been avoided if Congress acts will eventually come to us if they don’t. Taxpayers didn’t get paid any interest so it’s the bondholder’s liability and should stay that way. Donald Trump concurred. This could determine who wins Florida in the fall election as a new influx of Puerto Rican voters float into that state.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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