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Credit Slips Presents: A Virtual Symposium on Puerto Rico

posted by Melissa Jacoby

TablePuerto Rico debt restructuring legislation is flying fast and furious around Congress. But the air contains more than a whiff of defeatism regarding the prospects of passage. Bills vary greatly in substance and scope, and yet apparently the response of powerful creditors is consistent: they want to retain the right to be holdouts and are making that position perfectly clear to our elected representatives.

Credit Slips contributors are no strangers to anti-restructuring advocacy, whether framed as moral hazard or otherwise. To that end, we embark on a virtual symposium inspired by the following question: What could the Executive Branch do to facilitate the restructuring of government debt in Puerto Rico absent Congressional action? 

On tap to brainstorm around this theme in the next two weeks are (in alphabetical order): Anna Gelpern, Melissa Jacoby, Bob Lawless, Adam Levitin, Stephen Lubben, Katherine Porter, John Pottow, Mark Weidemaier, and Jay Westbrook.

The "brainstorm" reference is intentional. We are exploring ideas, not writing advocacy briefs. What tools are illustrative from the most recent mortgage and financial crisis? Soft power as well as official power is on the table. Are there private transactions that might pave the way to bankruptcy eligibility that the Obama Administration could support or facilitate? Anything to be borrowed from transnational insolvency and sovereign debt crises? We will readily link to other thinkers on this subject, so, readers, please enrich this debate by posting in the comments or tweeting suggestions at me (@melissabjacoby).

By mid-March, we inevitably will venture into an additional branch of the federal government. On March 22, 2016, the United States Supreme Court will hear oral argument on Puerto Rico v. Franklin California Tax-Free Trust, 15-323 (Justice Alito not participating). Is Puerto Rico's own restructuring law preempted as the First Circuit and District Court held? Lubben says no and I, for one, have been finding that view a bit harder to resist. Stay tuned.

Conference room photo courtesy of Shutterstock



James E. Spiotto, Managing Director of Chapman Strategic, has written on Puerto Rico debt's restructuring options, and has submitted written testimony to Congress on several occasions.


Thanks for the link, Maria de los Angeles Trigo. The role of other federal actors, if Congress refuses to act, potentially dovetails with pp. 34-36 of this testimony: http://www.chapmanstrategicadvisors.com/media/publication/16_Chapman_Strategic_Advisors_Written_Statement_to_US_Judiciary_Committee_Re_Chapter_9_120115.pdf

The elements missing from most analyses I've seen are: that Puerto Rico is not a city (the discussions are really on how to put a country on receivership). Also, a federal fiscal oversight board, no matter how adorned, is a throwback to the 50 years Puerto Rico was under the direct management of the Department of War and the Department of the Interior. And those were 50 years of economic stagnation and political control. If the discussion doesn't start looking back to those decades, we'll be there again; people here in Puerto Rico remember those days very well. Payment of debt will be the least of the problems.

Yes, absolutely - we focus on the debt restructuring piece here because that's where our depth is and what some creditors are trying to block, but totally agree that context is essential.

As I recall, Spiotto's writings have analogized to state mechanisms requiring approval for certain financial transactions - is something more restrictive along these lines sufficiently different from the troubling approaches taken in earlier decades?

I don't think they are comparable, nor that they have to be.

Legal-theory-wise, my main question has been why is there a search for a precedent regarding Puerto Rico. Any decision will be taken under the territorial clause (both the Executive and Congress have been very clear on that), so that makes precedents legally unnecessary. The plenary power is plenary. Every decision taken on Puerto Rico has been unprecedented, because of its status within/without the US Constitution. At this point in history, the only limitations the US is subject to regarding Puerto Rico are the US Constitution clauses that SCOTUS has determined apply to Puerto Rico (since SCOTUS held that the US Constitution does not apply to Puerto Rico automatically, there are still clauses up in the air). This also makes absurd the argument that any decision on Puerto Rico sets a precedent as to the states. How can decisions taken under the territorial clause apply to a state? Decisions taken under the territorial clause apply, by definition, exclusively to territories. How could they be applicable to states, or set a precedent to states?

I'll also mention the limitations that the US has self-imposed in its relationship to Puerto Rico. If it treats Puerto Rico too much like a state, it will feed the idea of incorporation, and weaken the idea that Puerto Rico "belongs to but is not part of." That is why I find the argument of precedent-setting for the states not only absurd, but dangerous for the US: if decisions taken about Puerto Rico under the territorial clause actually set a precedent for the states, then either all the states are subject to the territorial clause, or Puerto Rico is more like a state than not, strengthening the argument of incorporation (which brings full application of the US Constitution, and not the nit-picking of the last 118 years). On the other hand, if the US treats Puerto Rico too similarly like a sovereign, the military, political, and economic controls weaken (which is one of the reasons, for example, why the US Department of State consistently intervenes to isolate Puerto Rico whenever it has tried to establish some kind of limited economic or trade relationship, but refuses to intervene in mitigating the impact that the US multilateral trade treaties have had on Puerto Rico).

Back to the board.

If it were about local governments' crises, then Mr Spiotto's analogy would work. Since the discussion (by Congress, the Executive, and creditors) is about the Commonwealth, the equivalent of a state mechanism would come from either the federal Executive directly, or through the board designed by Congress, all under the territorial clause.

More important than the composition of the board are the powers it will have, and how willing it will be to admit the impact the legal and political status has had on Puerto Rico's economic development. I do not see that happening any time soon: the discussions (even considering that it is an election year and even if politicians are just pandering to the idea of "the other", to quote Prof Lawless) have been limited to the fiscal and management issues. Mr Spiotto consistently mentions economic development in his writings. But in Puerto Rico, economic development and the political and legal status directly interconnect. And if one of these issues will not be touched even with a 50-foot pole, what happens to the other? So the discussion in Congress concentrates on austerity, firings, privatizations, and the usual suspects: a downward spiral that will not help creditors. An austerity that will finally kill internal demand, and that added to a strong dollar, will make it quite difficult for Puerto Rico's products to create external demand.

The past approaches were based on ignoring the real limitations that the relationship with the US has put on Puerto Rico. Recognizing that would require either: admitting that the US must subsidize "Puerto Rico's colonial economy" (to quote Prof Stiglitz); or that it is time to revisit status. And that is much more complicated (economically and militarily) than appointing an austerity board.

I believe Congress has no idea of the reaction or consequences it will provoke.

I cover several issues in answering your comment; it is difficult to limit my analysis to pure restructuring when there are so many moving pieces. Thank you for the opportunity of exchanging ideas with you, and for the symposium. It is good to have Puerto Rico studied at this level, far from the superficial and incomplete coverage in the media.

Thank you for sharing these thoughts, Maria de los Angeles Trigo - the discussion is much enriched by your contributions. The interconnectedness of the issues cannot be disputed.

At least from my perspective, the hunt for precedent helps because it deflates the argument that it (whatever the intervention might be) "simply cannot be done, period." Congress holds many cards but not all of them. But the fact that a tool has not been used before should not take it off the table now.

It can be done out of court just like what is done in Italy, which there is a mandatory recapitalization of the debtor or the debtor's assets could be liquidated to repay the debts.

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