New York Time’s article “Puerto Rico Debt Crisis Splits Congress on Party Lines and Draws Muted Response From White House” reports:
“The declaration by Puerto Rico’s governor that the island’s $72 billion in debt” was not only a warning to its creditors. It was also aimed at leaders in Washington, who perhaps more than anyone could determine whether Puerto Rico’s finances can be stabilized or will slide into chaos.
“But the federal response was relatively reserved on Monday. The White House made it clear that Puerto Rico would not receive a “federal bailout” but expressed some support for an effort to allow the island’s public corporations to use federal bankruptcy protections. As a United States commonwealth, Puerto Rico is not allowed to authorize bankruptcy, which means that impairing its debts could prove practically impossible.
“But the push in Congress for Chapter 9 faces stiff opposition from many Republicans, particularly conservatives, who say that allowing Puerto Rico to restructure its debts in bankruptcy would amount to a free pass for decades of fiscal mismanagement by local government officials…”
Access to Chapter 9 of the Federal Bankruptcy Code should be made available to all government entities and authorities. When that occurs, bond underwriters and their counsel will need to take into consideration re-payment ability rather than just mindlessly passing along junk on the supposition that tax payers can be made to pay.
When other cities including Detroit were permitted to seek protection and thus compromise payments of debt to the same bond guarantee company, then governor Tom Corbett insisted in allowing the company to extract the last ounce of flesh from Harrisburg taxpayers. What a disaster for the future of Harrisburg!
It is not likely that those bonds would ever have been floated let alone sold if the risk of non-payment had been made apparent. Nor would the proceeds have been allowed to be so wasted.
Interest rates reflect risks. When access is permitted to the bankruptcy act, rates will be greater as repayment becomes less certain, just as is the case with non-government bonds. Investors will have to decide whether the higher interest rates are worth someday having a court reduce the amount they will be repaid. They will recognize that government guarantees will only protect them so far.
Capitalism embraces risk. There was a time that the Grand Old Party did also. Now it appears that those in control only care about protecting the rich, taxpayers be damn.
Default by both Puerto Rico and Greece are a good thing. Investors need to learn that taxpayers will not support the borrowing folly perpetrated by inept politicians. Just because a politician takes a loan does not mean the taxpayers will or should support it.