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Key Congressman Sees No Bailout for Commonwealth, States Would Lose

A key congressman Friday threw cold water on the idea of a Federal bailout of the Commonwealth of Puerto Rico’s troubled finances.

Representative Jose Serrano may be the member of Congress most helpful to Puerto Rico.  He is the senior minority party member on the House subcommittee on funding for: the Treasury Department; the White House, including the President’s Office of Management and Budget and Council of Economic Advisers; and the Securities and Exchange Commission — most of the Executive branch authorities that would be involved in a bailout.

The New York Democrat, who was born in Puerto Rico, said that a bailout for the territory is “difficult because all States will suffer financial loss.”

During the past two months in particular, national news media reports and credit rating agencies have focused attention on the risky nature of the bonds that the Commonwealth of Puerto Rico has issued to borrow money to pay for its annual operations beyond the revenue it raises in addition to bonds to finance infrastructure, a better reason for incurring long-term debt and its interest costs.

Ownership of the bonds is widespread.

There was a significant amount of speculation the Commonwealth would default on the bonds or that the Government would redeem the debt for reduced amounts.

The reports prompted major mutual funds to sell the bonds.  With relatively few purchasers, the value of the bonds fell sharply, although prices of some recovered a bit recently.

The improvement in the value of the bonds considered to be Puerto Rico’s safest — paid for by sales taxes — came after the Government of Puerto Rico tried to reassure investors that it would make its interest payments and repay principal on all of its debt.  Officials explained the steps that they have taken to increase revenues, cut costs, borrow money on a short-term basis, and grow Puerto Rico’s economy.

The financial markets, however, have been more convinced that the Commonwealth’s finances would not collapse in the coming months than they have been that its economy would improve.

It is the Commonwealth’s economic decline that has most concerned credit rating agencies and bond buyers.  A worsening economy means fewer resources to tax to meet debt obligations, and that is what analysts not working for the Government of Puerto Rico foresee.

The gap between lower incomes in the Commonwealth and higher incomes in the States has widened for four decades.  The Commonwealth’s economy has been in decline for a decade and in recession for seven and a half years.

Although the Commonwealth government estimates growth in this and future years, independent economists project continued contraction this year and see no reason for optimism beyond.

‘Hedge’ funds that make riskier investments have bought some of the Puerto Rico bonds that more conservative investors have sold at a loss.  Some hedge funds and some insular officials hope that the Federal government will prop up the value of the bonds through purchases or guarantees or through more special assistance for Puerto Rico’s budget or economy than at present.

The Obama Administration has been monitoring the situation and asking how it can be helpful, trying to assist Puerto Rico in accessing Federal funds to which it is entitled, and continuing minor efforts to aid Puerto Rico’s economy along with that of the nation as a whole. The Treasury Department, however, has emphasized that it is not developing plans to support the debt financially.

Its statement in this regard dovetails with those of Puerto Rico’s Garcia Padilla Administration, which has said that it does not need and has not asked for special assistance regarding the bonds.  There was so little basis to a declaration by Senate President Eduardo Bhatia to debt investors that he expected an economic package for Puerto Rico from the White House that he had to quickly retract the assertion.

Speculation of a Federal rescue for the Commonwealth’s precarious financial position persists, however, perhaps because of wishful thinking.  One conjecture is that the aid could be included in the budget deal that congressional leaders of both parties and aides to President Obama have said that they will try to reach by December 15th.

Serrano dismissed that idea.

He also noted that the Commonwealth’s territory status is “the heart of the problems in Puerto Rico.”

Not being a State, Puerto Rico cannot expect to receive assistance equal to that given the States, let alone greater aid.  Far less than equal funding in some major social programs disadvantages the Commonwealth’s economy as well as individual Puerto Ricans.

Serrano also pointed out that Puerto Rico lacks the power of a nation to reform its economy.

Until the question of the Commonwealth’s ultimate status is resolved, there will not be a substantial improvement in the territory’s economy, Serrano recognized, mirroring a 2011 conclusion of President Obama’s Task Force on Puerto Rico.


1 thought on “Key Congressman Sees No Bailout for Commonwealth, States Would Lose”

  1. Stop colonialism with Puerto Rico.
    Proceed with a final plebiscite that could bind Congress with the People of Puerto Rico decision, either statehood or independence.

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