Puerto Rico is trying to use a bankruptcy provision approved last year to ameliorate its $123B debt. Now this is important for many reasons but I just want to focus on one. This bankruptcy, and the potential of stiffing the bondholders, will be beneficial in the long run. Why? I mean, we all think people should pay their debts, don’t we? So why shouldn’t Puerto Rico?
I think the concept of Odious Debt applies here. Politicians will often promise great current benefits to taxpayers and employees, and borrow to the hilt so that some future generation will be left holding the bag. I think this is immoral, especially when the bondholders lend well beyond any reasonable ability to repay. These bondholders kept loaning money at higher interest rates to Puerto Rico in the hopes that some taxpayer somewhere would be left holding the bag. It’s almost as if they thought they could extend too-big-to-fail to government funding (it worked for Greece, didn’t it?). If Puerto Rico’s current bondholders take a significant haircut on the amount they they thought they were going to receive, it may stop other bondholders from continuing to lend to profligate cities and municipalities elsewhere, and then maybe we could avoid having these crises in the first place.
The burned hand teaches best. I’m not crying for the burned hands of Puerto Rico’s bondholders. I will cry for the poor abused Puerto Rico taxpayer.