The travails of the European Union and its efforts to maintain a unity of fiscal policy continued this week with the Greek default on its IMF loans. Euro-skeptics can be forgiven for clucking their tongues and issuing I-told-you-so’s, but those in the US should take care not to get too sanctimonious. We have a common-market default of our own here, and the politics of its resolution may prove just as fractious.
The EU has struggled to keep Greece within the EU, but the default of Greece on its IMF loans and Prime Minister Alexis Tsipras’ defiance of European Union demands for austerity have pushed that relationship to the breaking point. Tsipras rejected a last-minute proposal from Europe and threatened to hold a plebiscite to demonstrate Greek unity against more austerity as a condition for a third bailout. That may turn out to be an empty threat; a poll of Greek voters shows support eroding for Tsipras’ position as the banks stayed closed to protect what little cash the country has.
Besides, the EU legal authority to extend the bailout ended on July 1, which means that it will now take legislative action to allow for any kind of a deal at all – and that will take weeks, at minimum. The approach of the “Grexit” from the Eurozone appears imminent, especially with Germany balking at any further concessions to the Tsipras government in Athens.
The US has its own headache in Puerto Rico. Earlier this week , the governor of the American territory declared that the island’s debts are “not payable.” Governor Alejandro García Padilla’s declaration deals with a larger debt than Greece, at least in the short term -- $72 billion on which Puerto Rico could default. (Greece wants an additional $32 billion in the short run to avoid default and restructure their debt, but their full debt load is over $300 billion.) García Padilla told the media this week that Puerto Rico might have to push off payments for as long as five years, a move that would make those investments all-but-worthless in the meantime, which would have significant impact on US markets.
The Washington Post warned that this could “roil municipal bond markets,” but notes that Puerto Rico is hardly the only debtor to blame for that problem. Several American municipalities have sought refuge in Chapter 9 bankruptcy over the last few years, most notably Detroit, Michigan, and Stockton, California. More cities, counties, and states might seek that option as the staggering burden of defined-benefit public pension systems become too onerous to manage.
Puerto Rico’s potential default dwarfs those examples.
Detroit’s default dominated headlines for weeks, eventually pushing Michigan Governor Rick Snyder to take charge of the bankruptcy plan and devise a rescue. The fiscal scope of Motor City’s default was only a quarter of the size of Puerto Rico’s footprint in the municipal markets. Puerto Rico can’t declare a Chapter 9 bankruptcy, a process that provides some protection for creditors, because the law excludes American territories from its use. Instead, García Padilla is essentially delivering an edict to its creditors and offering them no assurances in return.
If all that seems Greek to most Americans, it won’t when it hits their pocketbooks. Those creditors include a large number of mutual funds, which means the failure will spread to the savings of many Americans. That will put significant pressure on the US government to solve the crisis in Puerto Rico.
Thus far, the White House insists that it will not intervene in the potential default, although Josh Earnest pledged that the Obama administration will work with Puerto Rican officials “as they address the serious challenges,” and noted that Treasury would create an interagency task force to identify federal programs that could improve the island’s position. It’s also worth noting that the hands-off policy regarding Puerto Rico’s default comes at the same time that Barack Obama established full diplomatic relations with its Caribbean neighbor Cuba, a nation still oppressing its people and conducting human-rights abuses.
Instead of bailing out Puerto Rico, Earnest tossed the ball to Congress, pushing them to amend bankruptcy law to allow Puerto Rico a way out of their crisis. Senate Democrats want to take up the issue, led by Chuck Schumer (NY) and Richard Blumenthal (CT), who both represent constituents with heavy connections to bond markets. Republicans seem to be more cautious, and conservative groups warn that expanding Chapter 9 to Puerto Rico would amount to a bailout in effect, if not directly. The Center for Individual Freedom declared Garcia Padilla “the Kirchner of the Caribbean,” and demanded a federal control board take charge of Puerto Rico’s finances.
How will that fly with Puerto Rican voters in the US, especially in the large enclaves of the I-4 corridor of Florida? This demographic in the key swing group of counties in Florida could very well determine which party takes the state in the 2016 election, which means that both Republicans and Democrats have to tread carefully in a complicated situation.
Jorge Bonilla, who ran for Congress in Florida in 2014, told me that Puerto Ricans who have moved to Florida know the dysfunction of their native island all too well. The GOP has done little to address the situation, however, which has left these voters looking exclusively to Democrats. “Stateside Puerto Ricans, having fled the soft tyranny of Big Government, should be regarded as a potentially natural conservative constituency not seen since the Cuban exile community,” Bonilla told me.
Republicans should engage these voters fleeing the island – roughly “the equivalent of three Mariel boat lifts,” only with American citizenship – to see the lessons from “the painful, brutal consequence of the structural and institutional decay resulting from decades of unfettered liberal Democratic governance (both from PPD and PNP administrations alike).”
Until now, though, the Republican response to Puerto Rico’s failures has been at best benign neglect – neglect that extends to those seeking a better life even though they have familial and emotional ties to the island they left behind. Bonilla agrees that Congress should not just bail out Puerto Rico, but any aid should come with “strict Congressional oversight” that would require “radical political, constitutional, and structural reforms that are beyond the will of its existing political class” in Puerto Rico.
This crisis could give Republicans a chance to design a policy that neither imposes federal receivership nor an unaffordable bailout, but offers aid conditioned on a series of free-market reforms that will restore investor confidence in Puerto Rico while marginalizing the entrenched establishment that has led the territory to ruin.
Will it be easy? Of course not, but it’s worth doing – politically, financially, and civically. A comprehensive Puerto Rico policy would show voters that the GOP takes governing seriously and would give Republicans inroads to a key 2016 constituency. It worked for Snyder in Michigan when Republicans around the country were more inclined to let Detroit disintegrate.
If Puerto Rico and/or Democrats reject a Republican plan to reform the structural failures that produced this massive failure, then they will own the failure much more explicitly than they do now, and that will matter in Florida too – and everywhere else.
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