As deadline looms, here's how to fix Puerto Rico

With all the hullabaloo over Brexit, Americans may forget there is another sovereignty controversy simmering much closer to home, that being Puerto Rico’s dire economic straits. It’s a crisis that could be coming to a head—or perhaps on the road to resolution—over the next few days. I recently sat down with Richard Ravitch, former Lieutenant Governor of New York and a longstanding authority on restructuring who helped fix the New York City debt crisis of the 1970s. Now Ravitch has been offering his expertise to help resolve the Puerto Rican crisis. “I’m a kibitzer,” he explains. “I talk to everybody about the subject giving them the benefits of my experience, such as it may be.”

I asked Ravitch a fundamental question: Why is Puerto Rico in so much trouble? “Because the politicians did the same thing they did 40 years ago in New York and what they did the last 15 years in Illinois and New Jersey,” Ravitch says. “They prefer to borrow rather than tax or cut expenditures in order to meet the obligations that they and their predecessors incurred…Puerto Rico was an egregious case of that.” Ravitch points to excessive borrowing, the withdrawal of a federal subsidy that was key to American companies investing there, as well as an exodus of the population to the United States.

Two critical deadlines loom: On Monday, June 27, the US Senate will vote on a bailout bill the House passed earlier this month. And on July 1, Puerto Rico is due to make a $2 billion payment on its $70 billion in debt. If the Senate passes the bill and the president signs it before the July 1 deadline, Puerto Rico may not have to pay the full July bill. In fact, it would likely only have to make interest payments until next February, giving a newly created Oversight Board time to come up with a plan.

The bill has bipartisan support in Washington, as House Speaker Paul Ryan, Nancy Pelosi and the White House pushed the bill—though Donald Trump has said he is against a bailout—and both parties agree that stabilizing the territory is critical. Says Ravitch: “Hopefully the debt will be restructured, a sensible rational budget will be adopted and incentives will be generated causing people to invest there and the economy will stop going downhill.”

Puerto Rico’s situation is hardly unique, of course, and I asked Ravitch if there were similarities between Puerto Rico and other troubled economies around the world like Greece, Italy, Spain and now Venezuela. Ravitch said yes, noting that the cause of fiscal stress is not fundamentally different: Excessive borrowing.

“The market has to stop throwing money at insolvent governments at higher and higher interest rates,” he says, “because it is an unsustainable practice.” That of course is a bigger issue, which speaks to market cycles and global money flows. As Ravitch would be the first to tell you, the matter at hand is trying to get Puerto Rico back on its feet.