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Political fútbol

3 November 2015 By Kevin Allison

U.S. election-year posturing will complicate efforts to save Puerto Rico from a 2016 financial meltdown. The administration of President Barack Obama wants Congress to help the island out from under a $72 billion debt pile by passing laws to restructure the territory’s liabilities, create stronger fiscal oversight and tweak Medicare and tax credits. The measures make sense, but the timing is terrible.

Years of fiscal mismanagement and a long economic depression have left the island of 3.5 million residents struggling to pay creditors. Interest expenses are alone gobbling up more than 30 percent of revenue, according to the Treasury Department.

Governor Alejandro Garcia Padilla has warned Congress that Puerto Rico could run out of cash before the end of this month. While some hedge funds and other creditors question the government’s figures, there is little doubt that the financial situation is unsustainable. The issue is how to distribute the pain fairly between residents and creditors.

The Treasury Department on Oct. 21 urged U.S. lawmakers to approve a path to bankruptcy for the commonwealth, provide for independent oversight of the island’s finances, expand residents’ access to Medicaid and enact a local version of the earned-income tax credit. Tougher financial controls and tax assistance to workers should be relatively uncontroversial, but Medicaid expansion is sure to ruffle feathers in an election year.

A bankruptcy option may be even more contentious. Like states, Puerto Rico can’t restructure its debt in court. Some critics fear giving it that power would prompt cash-strapped states to demand similar treatment, perhaps leading to doubts about the safety of state debt and raising borrowing costs across the country.

Treasury’s insistence that its proposals don’t amount to a bailout won’t stop political candidates from calling them exactly that. Multiple congressional committees would have to approve the reforms, giving lawmakers seeking re-election ample opportunity for grandstanding.

Puerto Rico does not have a vote in Congress or participate in the Electoral College. Some 5 million of its former residents are, however, concentrated in Florida, New York and other politically important states. Their voices could persuade lawmakers to back Treasury’s plan before the crisis becomes too severe. Washington will have to overcome its partisan gridlock, though, to provide a little Caribbean sunshine.

This view is a Breakingviews prediction for 2016. Click here to see more predictions.


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