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The Perverse Incentives of Puerto Rico’s Debt Deal

Puerto Rico’s Financial Oversight and Management Board was established under former President Barack Obama’s administration. It recently agreed with the Commonwealth to help restructure its debt. The island has been in default since 2017. The media outlets are SpeculativeAbout a possible “end of the largest bankruptcy proceeding ever in U.S. history.” Only remaining hurdle is approval by Chief United States District Judge Laura Taylor Swain of U.S. District Court, Southern District of New York, who will be in charge of proceedings under the 2016 PROMESA law, the Puerto Rico Oversight, Management and Economic Stability Act.

However, Swain was unable to sign the deal until after the Puerto Rico Governor’s federal oversight board accepted it. Pedro Pierluisi demanded “zero cuts to pensions of existing retirees, and accrued benefits of active government employees”, plus $500 million annually for the University of Puerto Rico through 2027.

John Dizzard is the founder of Financial Times WritePuerto Rico’s holders of defaulted debt bonds have been given “deep haircuts” on their face values, while the pensions for former employees in the public sector are kept intact. Politicians are making secured credit investing more complicated as bondholders become pensioners.

One of the Hearings on Puerto Rico’s defaulted Debt Be concernedNotes: $3 billion in bonds backed Puerto Rico’s highway tolls, excise and other taxes. $800 Million “in debt secured with taxes on rum paid by the federal government to Puerto Rico.” Courthouse News ServiceThomas F. Harrison, a member of the Harrison family. Harrison states that the insurers of the bondholders sought to collect the revenue from the trust funds after the default. But, Harrison claims, it was discovered by Harrison, that the Puerto Rican government had taken the money.

Federal oversight board has legitimized such conduct because of precedents from 2008-2009 Detroit carmakers bankruptcy proceedings, as well as the bailouts. The Puerto Rican debt transactions also involved some of the same decision makers as during the financial crisis.

Obama appointed Arthur J. Gonzalez, a former Puerto Rico judge to his federal oversight board. Gonzalez headed the Chrysler bankruptcy case in 2009. Todd Zywicki, a George Mason University professor of law, was responsible for the Chrysler bankruptcy proceeding. WriteThis is the “egregious” part of it: The company secured bonds holders were forced into paying 29 cents on each dollar to their creditors. Meanwhile, the underfunded pension plans of the United Auto Workers—unsecured creditors, but possessed of better political connections—received more than 40 cents on the dollar.”

Gonzalez ReceivedIn October 2020, Puerto Rico’s oversight board elected him to a new three-year term. The recent agreement on debt still carries the Chrysler bankruptcy spirit. It could also have repercussions beyond Puerto Rico.

Marc Joffe is a senior analyst with the Reason Foundation, the nonprofit which publishes this site. He comments that “what does it tell retail buyers of municipal bonds in the U.S. mainland regarding who will be saved after default?” Puerto Rico’s political pressure groups have attempted to focus attention on the “vulture funds” hedge fund investors who bought defaulted bonds to get a bailout. However, it is clear that more than two-thirds of the municipal securities “are held by individual investors directly or via mutual funds,” as per the Municipal Securities Rulemaking Board.

Atara Miller is an attorney with Milbank in New York. Courthouse NewsPuerto Rico’s debt proceeding has left bondholders “with an umbrella we can only use when it is sunny.” It is possible for contagion to spread to states like New Jersey, Illinois and Kentucky with unfunded pensions schemes and high debt.

It could also have an impact on the whole municipal bond market. More than $4 TrillionThe Puerto Rican debt crisis has made mockery of both general obligation bonds and revenue bonds. Cate Long (a municipal finance expert) claims that Puerto Rico is now three years late in releasing its audited financial statements. However, Congress explicitly mandated that Puerto Rico’s financials be current under the PROMESA law.

Although Puerto Rico is still behind in its debt service payments, the government’s spending has increased by more than 12 percent. Dramatic population reduction. Long claims that Puerto Rican officials have come to realize “how easy it can be to conceal financial data, pretend austerity and fool creditors.” The U.S., for its part, says that Puerto Rico is being encouraged to become “a serial defaulter” like Argentina. brinkIts tenth anniversary In defaultSince 1816.

It is alarming to see the comparison. Argentina’s long-standing habit of taking out huge amounts of global debt before resolving it is evidence of internal political workings. As scholars Pablo Spiller (of the University of California, Berkeley) and Mariano Tomassi (of the Universidad San Andrés in Argentina) I wrote 2007Argentina’s federalist model combines centralized tax collection and funding with decentralized spending. It was established in late 19th century and is still used to motivate “subnational governments.” [to]Adopt a loose fiscal policy in the hope that they’ll be saved in case of fiscal crisis. 

According to them, top politicians in the region are often the crony operators who excel at extracting rents from the common pool. Negotiating rescue package agreements with the International Monetary Fund, for example, has been made an official job of an Argentine president. Will governors of Puerto Rico assume the same role vis-à-vis the White House and Congress?

U.S. taxpayers must consider the long-term implications of Puerto Rico’s bailout. Children of politicians are often overrepresented in this area. recipientsof seven-figure government contracts and six-figure government salary. Latin American exports such as the habitual debt busts at Buenos Aires are best kept off the dock.