The FT published a piece this week suggesting that it’s actually perfectly legal for the Puerto Rican government–which is on the brink of insolvency–to change its constitution and repudiate its guarantee to general obligation bondholders, in a rhetorical sleight-of-hand that makes me convinced that Jacques Derrida has won the war for the hearts and minds of America’s youth.
The article’s proposal is at once banal and unserious, and much of it they credit to their students, presumably because they recognize this: the first is that while the Puerto Rican constitution may guarantee the payment to the general obligation bondholders with the full faith and credit of the government, that doesn’t mean that the commonwealth’s government couldn’t just change the constitution and eliminate this pesky promise. Legality achieved! Laws change all the time–even constitutions–they aver, and debtors shouldn’t be surprised if that happens in a way that just happens to hurt them financially.
Another way for the commonwealth to get around the constitutional promises, they suggest, is to make use of provision 3105 of Puerto Rico’s civil code, which “recognises that creditors sometimes have a duty not to enforce debt in ways that prejudice other creditors.”
The other creditors in this instance are the retirees and state employees of Puerto Rico, who may see their wages or pension benefits frozen as a part of the island’s financial reforms. Doing such a thing is, in their perspective, always and everywhere a disaster, and setting aside the law is justifiable because of the harm that would be done if other government spending were ever forced to be cut in order to pay the island’s debt.