This Friday, $2 billion of Puerto Rican debt comes due. The struggling U.S. territory has been unable to repay it, but thanks to the efforts of congressional Republicans, it should have some more breathing room.
The bill responsible for saving Puerto Rico, passed Wednesday morning, was heavily contested in the Senate, and struggled across the finish line at the eleventh hour. Now that it is passed, it will establish an oversight board to assist Puerto Rico in managing its public finances, particularly by restructuring the debt it owes without court intervention. While this does not exempt the territory from the severe austerity necessary to fulfill its financial obligations, it can help avoid a worst case scenario through negotiation, giving the beleaguered debtor extra time before lawsuits come crashing down and more agency about how and what programs to cut.
In a worst-case scenario, the island would have defaulted on its debt. Swarms of bond holders and creditors could then have filed lawsuits to win back their money, and win. Puerto Rico, still cash-strapped, would have been legally obligated to dip into the seed corn of vital services to pay up. For the 3.5 million residents, more than 200,000 of whom work directly for the government, this would have been an unprecedented “humanitarian crisis.”
Those, at least, were the words of Senate Democratic leader Harry Reid. And yet, he led a coalition opposing the last, best chance to prevent such a crisis until the last minute.
Reid and his allies opposed the bill for a number of reasons, essentially amounting to one complaint: “Austerity isn’t pleasant.” Of particular concern was a section of the Puerto Rico bill which authorizes some young government employees to be paid less than minimum wage. That said, to resist a bill for simply including austerity measures, while knowing that the alternative will be worse, requires a special kind of myopia.
Coincidentally, Reid and another vocal opponent of the bill, Senator Robert Menendez (who spoke for four hours straight on the issue and voted against the bill), share a large donor. The Blackstone Group, a large finance company, has donated $84,300 and $31,250 to the respective senators of the course of their careers.
Blackstone made the news last week for picking up a stake in Marathon Asset Management, a hedge fund which owns much of the Puerto Rico Electric Power Authority’s debt.
Such an investment benefits from American indecision because negotiating with an official, experienced oversight body to restructure debt raises the likelihood of less return over a longer time frame, while a lawsuit could recover 100 percent returns quickly.
This connection between Blackstone and the opposition to the Puerto Rico bill is of course not conclusive proof of any wrongdoing or cronyism. Correlation does not equal causation; Blackstone could more easily have decided to support senators it thought would naturally side with its interests than corrupt them out of whole cloth. Nonetheless, that these senators would so recklessly and illogically oppose the creation of an oversight board rightly raises questions.