On Tuesday, President Trump said something about Puerto Rico that was sort of right. And no, not just the bit about it being “an island sitting in the middle of an ocean.” Of the American locales that have been hit by hurricanes in recent weeks, he wrote in a series of tweets, “Texas & Florida are doing great but Puerto Rico, which was already suffering from broken infrastructure & massive debt, is in deep trouble. It’s old electrical grid, which was in terrible shape, was devastated. Much of the Island was destroyed, with billions of dollars owed to Wall Street and the banks, which, sadly, must be dealt with.”
One way of interpreting Trump’s tweet salad is that he was saying the wreckage of Hurricane Maria was somehow Puerto Rico’s fault—that because its fiscal situation was so bad, Puerto Rico somehow deserved the deluge or that the damage was somehow amplified by the territory’s level of debt to GDP. Obviously, that would be a shameful message for a president to send at a time when millions of Americans lack electricity and other services and are waiting for relief.
The more charitable and hopeful way of reading Trump’s tweets is that Puerto Rico needs to be rebuilt and reconstructed—and that unfortunately, it must do so at a time when it is already crippled by the interest payments it must make to banks and bondholders. And (work with me here) the damage should lead people to seek a more dramatic solution to Puerto Rico’s debt issues. Simply put, it won’t be possible to reconstruct Puerto Rico’s infrastructure, economy, or society without reconstructing its finances. If that’s what Trump was going for, it’s dead-on.
Wall Street and the banks do, indeed, have to be “dealt with.” And perhaps they need to be dealt with in the same way that Trump has dealt with banks, Wall Street, and real estate lenders throughout his career: by telling them to take a hike and settle for far less than they expected.
Indeed, debt haircuts, restructuring, and lenders writing off large quantities of debt are an essential part of the real estate industry.
They need to be a more essential part of the government bond industry.
Here’s the problem. Before the storm, Puerto Rico was essentially dying—our own Greece in the Caribbean. Prolonged public debt crises are remarkably debilitating and cast a pall over the future. Puerto Rico has been in recession for a decade. With no economic growth, its economy labors harder every year simply to come up with the money needed to make interest payments. Because of a lack of investment and opportunities, people increasingly decide there isn’t much of a future. And so they stop making babies. The U.S. had a small baby bust in the wake of its Great Recession. In Puerto Rico between 2008 and 2015, the number of births fell by nearly one-third.
Or they simply leave. And as Henry Grabar notes in Slate on Tuesday, hundreds of thousands of Puerto Ricans have voted with their feet. This flight only exacerbates the debt problem: There are fewer people working and consuming to generate the taxes and revenues necessary to service debt, which leads to more cuts in investment. Which makes building a future in Puerto Rico even less appealing.
How does the hurricane impact this calculus? Well, it exacerbates the problem.
Given that many of Puerto Rico’s systems were decrepit and outdated—the island generates electricity by shipping in oil and burning it—the destruction presents an opportunity not simply to rebuild, but to build a more effective and resilient one. But that takes a lot of money. And the reconstruction can’t be funded simply with insurance payments or even with whatever handouts the Republican Congress will provide.
Bondholders don’t pause for weather. In order to stay current on debt, entities in Puerto Rico have to keep making interest payments—even when they’re not collecting revenues. Some of the first cash that Puerto Rico’s power authority and other government agencies get from insurance or government aid will be funneled to the pockets of bondholders.
The Puerto Rico Electric Power Authority, which provides electricity on the island, has $9 billion in debt and was in bankruptcy before the hurricane hit. Each year, it is on the hook for hundreds of millions of dollars of interest payments—all before it can spend a penny on fuel, salaries, upkeep, or transformation. (PREPA’s investor relations website, like the power supply, is offline.) Simply put, it won’t be in a position to rebuild unless it is able to deal with the banks and Wall Street on a pretty aggressive basis.
The same holds true for Puerto Rico at large, which has $73 billion in debt. This in a territory with a GDP of $103 billion—Puerto Rico is about the size of Mississippi and about as poor. Again, the first $3 billion to $4 billion of revenue Puerto Rico generates each year goes to pay interest without making a dent in the total. Puerto Rico couldn’t afford those payments before the storm, and it certainly can’t afford them now.
Is this sad landscape what Trump had in mind with his tweets? OK, I doubt it. But Puerto Rico doesn’t just need a haircut of 15 to 20 percent on its debt, which is common in bankruptcies. It needs a buzz cut with large chunks of debt either forgiven, wiped out, written off as uncollectable, or assumed by the federal government. That’s how its problems can be “dealt with.” Will Trump deal with them?