For decades, Puerto Rico issued bonds to cover budget shortfalls, and investors snapped them up because the bonds are exempt from federal, state, and local taxes in all 50 states. Then in 1996 the territory hit an economic crossroads. Congress ended hefty tax breaks for U.S. manufacturers operating in Puerto Rico, and American firms began shuttering their operations on the island, causing the economy to slump. Instead of restructuring its economy, Puerto Rico doubled its debt over the next 10 years, and Wall Street firms made nearly $1 billion off the fees. Those bond sales let the territory's bloated government — which employs a quarter of the workforce — meet its budgets without terminating workers. But the economy remained stagnant, and the government was soon overwhelmed by its vast debt obligations.
Now Congress is considering granting Puerto Rico bankruptcy protection after it has run up a massive debt creates moral hazard in the financial markets. Creditors extended loans to the territory on very favorable terms precisely because it could not escape obligations through bankruptcy.
At the very least, if Congress considers any legislation to assist Puerto Rico, it must be combined with sweeping reforms of the island’s economy and public sector. Granting the island a temporary reprieve from its debts without fundamental reform simply lays the seeds for a future crisis.
This is similar to what the European Union has done with Greece. They have allowed restructure after restructure with demands for reform, but little reform has taken place. Another crisis is pending shortly.
The United States has many such scenarios like Puerto Rico in other states and cities. In fact the United States is in worse relative shape than Puerto Rico.
Grossly overextended governments with no hope of survival except through a bankruptcy or restructuring are the rule and not the exception in today’s world. Reports of a very over extended Chinese government are running rampant.
Just like Greece and Puerto Rico, the governments are quick to seek relief but refuse to reform. The United States is no different. The world’s financial markets will be hard pressed to absorb a restructuring of the Chinese debt or the United States debt. We must learn from these other examples and demand major reforms in our irresponsible spending. A major overhaul of our entitlement programs must take place immediately. As we are witnessing in places like Greece and Puerto Rico, something for nothing does not exist.