Ramesh Ponnuru, a senior editor for National Review, has written a column for Bloomberg View that responds to some of the concerns which have been expressed about allowing Puerto Rico to use chapter 9 bankruptcy protection.
Chapter 9 allows States to give municipalities (including cities, public utilities and the like) permission to restructure debt. Puerto Rico is specifically excluded from this protection by a clause added in 1984. Legislation to allow Puerto Rico to use chapter 9 again are currently pending in the U.S. House of Representatives and the Senate, and the White House has urged Congress to take action on those bills.
Ponnuru lists and comments on a range of objections to chapter 9 protection for Puerto Rico. First, he notes that Chapter 9 extension to Puerto Rico would not amount to a government bailout of the U.S. territory. Chapter 9 would instead provide a structure to allow Puerto Rico to work with creditors to come to some agreement – the same structure available in the 50 states. A bailout, on the other hand, would involve paying the creditors with public funds.
Organizations like Americans for Tax Reform, Ponnuru points out, favor chapter 9 for Puerto Rico, because they think that a bailout could happen, regardless of what the White House says, if Puerto Rico does in fact run out of money. Maintaining schools, law enforcement, and public utilities in Puerto Rico could cost taxpayers quite a bit, while chapter 9 bankruptcy is a structure that would cost them nothing.
Ponnuru also addresses the claim that extending Chapter 9 bankruptcy protection within Puerto Rico would undermine investor confidence in the territory.
Investors who have seen Puerto Rico’s bonds reduced to junk status and heard a public announcement from the governor that the debts are “unpayable” should already not have much confidence left in Puerto Rico, Ponnaru says. If those facts and the default on debts that took place in the summer didn’t undermine investor confidence, bankruptcy probably won’t change their minds either.
Ponnuru also makes the point that chapter 9 is an option for all 50 States. There is no indication that it decreases investor confidence in the states. Puerto Rico’s investors shouldn’t see it as more problematic for Puerto Rico to be treated like a State.
Another criticism of Chapter 9 Ponnuru addresses is that it would amount to changing horses in midstream – some commentators have said that Puerto Rico’s creditors invested in the understanding that Puerto Rico couldn’t use chapter 9. Allowing the island to do so now would be changing the rules.
Ponnuru rejects that idea, saying that loans always involve risk. Investors in these cases know that it is possible that their loans won’t be paid back. “Bankruptcy,” he says, “would let the consequences of that fact play out in a relatively orderly fashion, while reducing the exposure of mainland taxpayers.”
Finally, Ponnuru takes on critics who claim that expanding Chapter 9 bankruptcy to be available in Puerto Rico won’t solve all of the territory’s problems.
Chapter 9 won’t apply to all of Puerto Rico’s debts, and it won’t solve the problems caused by a shrinking economy and increasing numbers of people leaving for the U.S. mainland. Ponnuru agrees, but doesn’t accept that fact as a reason to reject chapter 9. It would provide some protection for taxpayers, he believes, and would make at least part of the crisis more orderly.
The bottom line, for Ponnuru, is that the American taxpayers — including the 3.5 million U.S. citizens living in Puerto Rico — are not the ones who should pay for these debts. “Creditors,” he says, “not taxpayers, should take the hit for unwise loans.”