Mary Williams Walsh of the New York Times had a fascinating piece Monday about the desperate efforts of Puerto Rico’s new governor, Alejandro Garcia Padilla, to deal with the dire debt situation he’s inherited from his predecessors.
Sadly Slate does not seem interested in sending me to Puerto Rico for a little on-the-ground beachside investigation. But the broad outlines of the situation make me wonder why the option of simply stiffing creditors and defaulting on Puerto Rico’s debts seems to get so little consideration. A few key points. One is that right now “Puerto Rico has been effectively shut out of the bond market and is now financing its operations with bank credit and other short-term measures that are unsustainable in the long run.” Another is that though Puerto Rico has certainly made some pension promises, “the bulk of its debt is owed to investors that hold its bonds.”
Add those two together and here’s what you get. One way or another, Puerto Rico needs to engage in aggressive austerity measures to close its budget deficit, since one way or another Puerto Rico isn’t going to be able to tap international debt markets. But one way, whatever expenditures Puerto Rico has left after harsh austerity can be expenditures that provide public services to the residents of Puerto Rico. Another way, a large share of that money needs to go to off-island bond holders.
Now it’s easy to see which of those you’d prefer as a taxpaying resident of Puerto Rico. But the really striking thing is that the default option also makes Puerto Rico look more attractive as a forward-looking investment. It gives the Puerto Rican economy the best chance to grow and succeed. Even better, since a Puerto Rican default could have negative knock-on consequences for other elements of the United States, threatening to default is far and away the most likely route to obtaining some kind of bailout.
So why isn’t it being discussed more as an option? Like in the municipal context, public officials seem irrationally opposed to availing themselves of a tactic that’s time-honored in the private sector. If you’re riddled with bad debts—don’t pay!