The Proposed Puerto Rico Bailout is Good on Rhetoric but Bad in Reality

This article originally appeared in the Weekly Standard. Click here to read the full article.

By Ike Brannon

Everyone is in agreement that the federal government needs to address Puerto Rico’s insolvency sooner rather than later. What that would entail is where the consensus breaks down.

The big battle to date has been whether the federal government extends some version of Chapter 9 bankruptcy to the island. Chapter 9 allows the states to authorize the reorganization of the debt of their municipalities and government agencies, but it does not allow states themselves to restructure their own debts. The Treasury Department has agitated to not only allow Puerto Rico to avail itself of Chapter 9 protection but to expand the law so that it applies to the Commonwealth itself, essentially treating Puerto Rico like a municipality of the federal government. Puerto Rico’s entire debt is $72 billion, of which roughly $20 billion belongs to the commonwealth itself, is backed by the “full faith and credit” of Puerto Rico, and is given absolute priority by the island’s Constitution.