Puerto Rico Governor Ricardo Rossello and Federal Oversight Board Chairman Jose Carrion III will be in Washington this week to testify before Congress on the progress the Commonwealth has made since President Obama signed The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) into law last summer. At the time, the press heralded the legislation as a bipartisan achievement and a legislative victory for House Speaker Paul Ryan, but that declaration of victory is beginning to appear a bit premature.
Eight months later, and six weeks before the bill’s stay on litigation expires, Governor Rossello and Chairman Carrion are expected to put forth a rosy picture of the situation on the status of PROMESA. However, it’s clear that the island’s government is headed in the wrong direction, precisely because the Commonwealth has failed to adhere to the tenets of the law.
The intent of PROMESA was to help Puerto Rico resume economic growth and achieve fiscal solvency after a decade of recession and budget deficits. Once that occurred the next goal was the eventual return to capital markets: since its default on general obligation bonds—which the island’s constitution explicitly guarantees—Puerto Rico has been shut off from capital markets.
PROMESA attempted to facilitate negotiations with the island’s many creditor groups. One way it did so was by imposing a stay on any litigation related to the island’s default on its secured bond payments. The stay expires on May 1st. It also created a court-supervised debt restructuring mechanism under Title III of the Act, which congressional leaders and the Oversight Board intended to be used only if negotiations with creditors prove fruitless.
Unfortunately, the current creditor negotiations have been fruitless, and by all appearances the Puerto Rican government intends to pursue Title III come May, which would jeopardize the Commonwealth’s ability to access the markets for years to come. There are several reasons the situation has reached this point:
There seems to be little hope of a near-term agreement between Puerto Rico and its various creditor groups. Declaring an impasse and accepting a de facto reorganization is clearly the preferred route for the government, as it would allow them to avoid making any hard spending decisions.
This unfortunate reality is a direct result of Puerto Rico’s lack of fealty to PROMESA, the tool Congress provided to Puerto Rico to fix itself. Puerto Rico’s actions—first under Governor Garcia Padilla and now under Governor Rossello—have damaged its credibility with markets and amount to short-term expediency over the long-run interests of the island’s residents. Congress should utilize its Oversight powers to urge Puerto Rico’s leaders to conform to PROMESA.