Puerto Rico Bankruptcy–is bankruptcy ever a good thing?

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.

8 thoughts on “Puerto Rico Bankruptcy–is bankruptcy ever a good thing?”

  1. I really enjoyed reading this because the same thing can apply to us as Millenials in America. Just like Puerto Rico, our debt keeps increasing and it doesn’t appear to be slowing down anytime soon. This debt will keep being transferred down to new generations and what will stop it? I also like how you mentioned the immorality of letting future generations “be left holding the bag.”

  2. I have posted numerous places on the immorality of leaving our debts to our grandchildren. I blame the politicians for this, but we can not separate the politicians from the voters that elect them. I have never thought about the immorality of lending with increasing rates to governments who are headed towards collapse. I will admit the lenders are also culpable, but the responsibility comes back to the voters. The citizens are responsible for the actions of their government. We need to find ways to vote for responsible politicians. We have many politicians and social activists and “community organizers” who tell us if we don’t support all these programs we are mean spirited. BUT, if we don’t get spending under control, we will lose all that our parents had.

    1. Don’t kid yourself. There’s a huge population receiving these free benefits from government and unfortunately they also can vote. They’re not going to vote to take away the gravy train. Our elected officials have to be brave enough to do the right thing because it’s the right thing to do. Unfortunately, knowing human nature that’s probably not going to happen either. Maybe our last resort is prayer.

      1. The politicians deliver what the voters want or they don’t get re-elected. Some politicians don’t care about re-election, but most do. If the voters stay on the path of more gravy, governments will default on their obligations, cheating someone, and making it difficult for them to continue raise cash to continue the gravy train. There is a crash down the road. The voters will get what they vote for. Prayer should be the first and everyday resort.

    2. Gary–
      Not sure you meant to, but be careful not to treat the voters as monolithic. We can blame voters collectively, of course, because in the end the collective voters get what “they” want. But majority coalitions within voters (often only small minorities w/in the overall population pool) can oppress other voters. This is especially true since voters can shift costs to other voters (Tax the rich!!). So I don’t blame you, the voter Mr. Hild, nor should you blame me, the voter, Mr. Haymond for what the “voters” wanted. Interest group politics lead to the bad results we see.

  3. One can only hope that this situation catches the eyes of our own politicians, as it’s closer to home than normal. I realize that seems unlikely, but we can dream, can’t we?

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