Tags: Hedge Funds | Puerto Rico | Hillary Clinton | Bernie Sanders

Puerto Rico's Debt Woes Could Hand White House to Democrats

Puerto Rico's Debt Woes Could Hand White House to Democrats
(Dollar Photo Club)

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Wednesday, 11 November 2015 07:32 AM Current | Bio | Archive

With $72 billion in unpayable debt, Puerto Rico is in deep trouble. So are its lenders.

Naturally, they want all their money back.

If the lenders get their way, the rest of us could pay a steep price. Their solution may well put Hillary Clinton or Bernie Sanders in the White House for at least four years.

Here’s why.

Puerto Rico’s governor, Alejandro Garcia Padilla, said on June 29 that the U.S.-owned territory could not repay its massive debts. The commonwealth and various governmental entities ran up huge bills and pushed repayment out into the future. Now the future is here.

Was the spending wasteful? Probably so, but that isn’t the point. Someone has to hold the bag. The question is who it will be.

Similar situations in the fifty states normally land in bankruptcy court. The city of Detroit is so far the largest municipal bankruptcy, though Chicago may not be far behind. In such cases, the court considers arguments from all the parties and tries to reach a fair compromise.

Bankruptcy is not a perfect system, but is usually better than the alternatives. Donald Trump’s business bankruptcies are good examples (see "Trump Teaches Americans a Bankruptcy Lesson").

As Trump argued in the first presidential debate, “Lenders aren’t babies.” He was exactly right. When you make a loan, you voluntarily accept repayment risk. Higher interest rates compensate you for taking that risk. Occasional losses are part of the deal.

In Puerto Rico’s case, bankruptcy is not an option. Current federal law does not let U.S. territories declare bankruptcy. The island’s leaders want Congress to change this.

Otherwise, the territory could be stuck in financial limbo for generations.

A group of hedge funds that own Puerto Rican debt (bought mostly at deep discounts) opposes this move. Rather than take their lumps and move on, they want to make island slash education, health care and infrastructure spending.

That may seem like a good idea, but it creates another problem.

While physically beautiful, Puerto Rico is economically a third-world country. Its people are mostly poor and uneducated. Some don’t speak English, yet they are U.S. citizens.

Puerto Ricans can move to the U.S. any time they wish. They don’t need anyone’s permission. Immigration agents will welcome them, not stop them.

Legally, Puerto Ricans are as “American” as you are.

If the hedge funds impose austerity measures and make Puerto Rico even more unlivable, some number of Puerto Ricans will move to the mainland for its better welfare programs.

Once here, they get to vote.

Puerto Ricans living on the island can’t vote for president. Those living on the mainland can – and they lean heavily Democratic.

In 2012, Barack Obama carried Florida by only 73,189 votes. He won Ohio by 103,481 votes and lost North Carolina by only 97,465 votes.

Puerto Rico’s population is about 3.5 million. If a relatively small number move to the mainland in the next year, they will help those battleground states either swing or stay Democratic.

Welcome (back) to the White House, President Hillary Clinton.

If you want to avoid that outcome, then let Puerto Rico solve its problems through the bankruptcy process.

The hedge funds who oppose this should rethink their position.

Whatever their wealthy investors lose in bankruptcy court will pale in comparison to what President Clinton or President Sanders will cost them – and all of us.

Patrick Watson is an Austin-based financial writer. Follow him on Twitter @PatrickW


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If Puerto Rico's lenders get their way, the rest of us could pay a steep price. Their solution may well put Hillary Clinton or Bernie Sanders in the White House for at least four years.
Hedge Funds, Puerto Rico, Hillary Clinton, Bernie Sanders
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2015-32-11
Wednesday, 11 November 2015 07:32 AM
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