U.S. Treasury Warns Of Fallout In Wake Of Puerto Rico’s Financial Ruin

Puerto Rico

The United States Treasury issued a warning to Congress this week. If it does not act soon, the Puerto Rican government may collapse.

The Puerto Rican government remains afloat only because the territory’s government released $1 billion in emergency funds. All non-essential public monies, including pension assets and tax refunds, have been held or sold off. The government is already defaulting on its debts. Several lawsuits are also already in progress. If something is not done soon, the treasury says that the current crisis will become much worse.

The Treasury has proposed a plan to restructure the territory’s debt. The plan would maintain the territory’s integrity and self-governance. But it would still provide fiscal oversight for the Puerto Rican government, which would insure the Treasury’s investment. More importantly, it would help prevent Puerto Rico from entering another dark decade.

Puerto Rico has a poverty level of 45 percent and has suffered a ceaseless recession for the past decade. The island’s population is draining because the mainland is more attractive. The economy remains in freefall. The books are in such poor shape that it does not attract any outside investors which might provide hope.

But the Treasury needs Congress to help the island. It warned this plan must be considered above a federal takeover. The commonwealth state would simply reject the takeover and the crisis would grow worse.

Yet some on Capitol Hill would prefer to see an audit to assess the situation. The audit would not happen immediately and it would be lengthy. The Treasury insists that an audit is not required to understand Puerto Rico’s finances. The situation is so bad that the crisis is on the surface.

Still, the Treasury believes that waiting for an audit would only exacerbate the situation.

The ideal situation for Puerto Rico is to be able to use a system that resembles bankruptcy. The Obama administration and some House Democrats have stood as advocates for this plan. The Republicans express concern about damaging creditors. They would prefer to create a strict plan for the oversight of the island’s finances.

U.S. states are allowed to access Chapter 9 bankruptcy. However, the Treasury said it does not envision using this proposal for Puerto Rico. The financial situation is too dire and the political situation is too precarious.

Additionally, the situation is more complicated than previous bankruptcies. Puerto Rico has twice the number of agencies and twice the debt that Detroit had.

The island is home to only 3.5 million people. It also hosts 120 government agencies and controls 78 municipalities. The government also holds $70 billion in debt.

Thus, the Treasury is advocating for legislation designed and customized for the current conditions.

Puerto Rico has benefited from a control board before. The territory’s legislature created one in 2009. Witness Carlos Garcia told Congress that the board identified $4 billion in unnoticed debt and slowed down new debt. It also lengthened maturities and found a way to cushion the recent and new jobless.

Garcia was a chairman at Puerto Rico’s Government Development Bank.

The problem was that the board worked for only two years before the government dissolved it. Two years was not enough time to help Puerto Rico out of the hole it dug for itself.

Right now, Puerto Rico is on schedule to miss several upcoming payments on its debt. It’s $49.2 billion deficit means that it does not have the liquidity to make payments.

There are few available options available outside of oversight and cash. Its tax payers are gone and its emergency funds are depleted. It looks as though Congress will grant the legislation, if only because there is nothing else it can do.

[Photo By Joe Raedle/Getty Images]