The United States Senate held a hearing last week to help determine what, if any, role the U.S. government should play in helping the territory of Puerto Rico to resolve its financial mess. As the immediate past Governor of Puerto Rico, I have some perspective on the root of the island’s current problems, and what Congress and the White House should do to help.
Surely, Puerto Rico faces real challenges. On the one hand, these challenges are a result of a territorial status that no longer serves the 3.7 million U.S. citizens of the island well. The island’s residents rejected the present territorial status in a referendum on November 2012 and Washington ought to address their claims for a change in status. On the other hand, many of these problems are self-inflicted, and are the direct result of an out-of-control fiscal management process by the current government, that has destroyed the island’s credibility and allowed its bonds to be downgraded to junk status.
I must admit, it has been tough to watch the last 34 months, especially considering that not long ago, Puerto Rico was touted as an economic success story, and a model for other state governments. After being elected in 2008 as Puerto Rico’s Governor, my team and I cut spending and reduced the size of government by 20%. We cut a $3.3 billion budget deficit by more than two thirds. And as a result of our fiscal policies, our bond rating improved, our borrowing costs went down, we were able to attract foreign investment, and we created jobs.
By contrast, Puerto Rico’s current administration has increased spending during the last three years and roiled markets by recently announcing that the island’s debts are not payable. Indeed, the island’s government has already defaulted on a $93 million payment to Puerto Rico’s Public Finance Corporation (PFC) bondholders. In defaulting, the administration claimed that not paying bondholders is in the best interest of Puerto Ricans. But when it defaulted on PFC bondholders last month, Puerto Rico’s government defaulted on middle class Puerto Ricans, who hold the majority of these bonds.
What’s more, the administration has even flip-flopped on the matter of honoring Puerto Rico’s own Constitutional debt – the debt backed by our full faith and credit. Their most recent statements and Fiscal Adjustment Plan calls for the restructuring of all bondholders, even those holding bonds backed by the island’s Constitution. Defaulting on Constitutional debt would be a disaster and, contrary to the administration’s claims, would shatter Puerto Rico’s reputation with investors for a generation.
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