Puerto Rico already had a debt problem before Hurricane Maria. Its government had been borrowing too much money for years, and, with the population of the island dwindling, began missing payments to its creditors. Congress then passed the PROMESA law, which created an oversight board that would make fiscal decisions for Puerto Rico. That board wound up signing off on a ten-year fiscal plan, which economists Martin Guzman and Joseph Stiglitz said
risks leading to the flawed conclusion that Puerto Rico can manage a recovery with a much smaller haircut than it needs. Unless the plan is urgently redefined on the basis of credible assumptions, Puerto Rico will not recover, debt sustainability will not be restored, and the Board will have failed in its mission.
Their criticism is that the PROMESA board failed to appreciate how poor conditions on the island really are. The board’s assumptions form the basis for restructuring negotiations between Puerto Rico and its bondholders, newly permitted under PROMESA. So, Guzman and Stiglitz argue, the negotiation is unacceptably tilted against the island and in favor of the bondholders.
That was two days before Maria’s landfall, which obviously made things worse.
After the storm, President Trump got involved, suggesting that a drastic solution may be available to the deepening crisis. “We’re going to have to wipe that out. You’re going to say goodbye to that,” Trump said to Geraldo Rivera last week in reference to Puerto Rico’s debt. The implication — “I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that,” he continued — was that the United States would help the island evade its obligations to the bondholders. (The market subsequently had a conniption, with the price of Puerto Rican bonds falling almost 14 cents on the dollar overnight.)
Mick Mulvaney, Trump’s budget director, stepped in to clarify. “I think what you heard the president say is that Puerto Rico is going to have to figure out a way to solve its debt problem,” Mulvaney said later that day. “We are not going to bail them out. We are not going to pay off those debts.” But Mulvaney’s gloss is the opposite of what the president said, whether Trump is taken literally or seriously. To literally “wipe out” the debt is to help the island solve its debt problem. To help “wipe out” its debt burden by appropriating funds is to bail the island out.
Mulvaney walked back what could have been a politically shrewd move. Trump could throw his weight behind a law that extended Chapter 9 bankruptcy protections to Puerto Rico, or a reform or PROMESA that ordered the oversight board to pursue a more agreeable restructuring. He could sell it as putting the interests of poor Puerto Ricans before those of distressed-debt hedge funds, who believed the island to be insulated from default and had been happy to pick up the high yield of its bonds. After all, Puerto Rico would not have been able to borrow if nobody was willing to lend. Trump could silence the criticism that his administration has been slow to respond to the disaster and, more importantly, give the island a massive boost.
Of course, actually wiping out the debt would constitute an unprecedented government intervention into the economy and could destabilize the entire municipal bond market. Moreover, it’s wrong to blame only the lenders for this debt crisis. More proximate causes include the fiscal irresponsibility of the island’s leaders, the protectionist laws hurting its economy, and the nature of its relationship with the United States.
But while Trump’s comment was ill-considered, for him to float it was nonetheless instructive. We should be open to creative, sensible solutions to the island’s debt crisis, and Trump’s comment could have served as a jumping-off point for such a discussion. Mulvaney’s reflexive walk-back is another instance of Trump’s instincts being thwarted by his lack of policy knowledge and the stale thinking of those around him.