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June 1 2016

Beware of Bailouts and Other Bad Precedents

Carrie L. Lukas

In Puerto Rico, Congress is weighing the second iteration of legislation aimed at addressing the island’s debt crisis, which it finds itself in after years of typical big government budgeting and failure to fund its $46 billion pension system.  

The original draft of the “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA) received fierce opposition from free market thinkers and proponents of limited government, largely because of its failure to uphold the rights of Puerto Rico’s bondholders, who are largely regular Americans saving for their retirement and their families. Unfortunately, the second draft is still largely a failure in this regard.

The new legislation make it all but certain that the board will stop paying the island’s lenders and use their money instead to prioritize Puerto Rico’s neglected pension system – something that bondholders had nothing to do with. This is a pattern that the Obama Administration has advocated in past bankruptcy cases, and will certainly be the framework that liberals look to emulate in future debt crisis – meaning that those with savings invested in municipal bonds are far less secure than they were led to believe when they purchased them.

This surely isn’t the last time that a government, whether that’s another territory or a state or locality, will seek relief from government.  State governments such as Illinois (and, even more pressingly, the city of Chicago) are already teetering on the edge of requiring some sort of rescue. When the time comes to craft a solution, Congress will be hard pressed to ignore pressure from political stakeholders to rewrite rules in a way that will force bondholders to bear the brunt of losses if they’ve already done so in Puerto Rico. That is why legislation for Puerto Rico represents a huge threat to the security of bondholders all across the country. 

We all have an interest in Puerto Rico making it through this difficult time and moving toward fiscal solvency, but we need to make sure that the path to get there doesn’t involving making regular American bondholders pay for the mistakes of irresponsible governments. If that is the case in Puerto Rico, then it will surely become the norm everywhere else and have big implications for our financial markets more broadly.




Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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