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.
But every budget requires a government to decide how to split its revenue between debtors, capital projects, workers, and pensioners, and that inevitably means that the government must spend less in the short run than it would presumably like on police and teachers in order to satisfy its lenders. By this interpretation of provision 3105 Puerto Rico has the right to void its contract with its debtors at any time, even if it’s solvent. It would also mean that no one would have lent to them had they known it would be interpreted this way.
It is a fundamentally unserious idea.
The problem facing Puerto Rico is an age-old one that many governments throughout the world have faced: Puerto Rico can’t pay its debt and it has few options, but it doesn’t want its debtors or the federal government to constrain it in any way while it tries to negotiate a fresh start. Despite the fact that the U.S. Treasury wants to help them in their insouciance, this isn’t the way these negotiations work, and if they ever want to return to capital markets the commonwealth will have to either make some politically difficult decisions to reduce the size and scope of the government or else let someone do it for them.