02.02.16

Puerto Rico Control Board Hearing Wrap-up: Who is Congress Helping, Hedge Funds or American Citizens?

Hearing Wrap-up: February 2 Oversight Hearing on “The Need for the Establishment of a Puerto Rico Financial Stability and Economic Growth Authority”

Further austerity, while profitable for some investors, is counterproductive for the families of Puerto Rico

Witnesses

The Honorable Anthony A. Williams, Former Mayor of Washington, D.C., 1999-2007, Senior Advisor, Dentons US LLP

Mr. Carlos M. Garcia, Former Chairman and President of the Government Development Bank of Puerto Rico, Chief Executive Officer of BayBoston Managers LLC

Professor Simon Johnson, Professor of Global Economics and Management, MIT Sloan School of Management

Mr. Thomas Moers Mayer, Partner, Kramer Levin Naftalis & Frankel, LLP

Mr. Eric LeCompte, Executive Director, Jubilee USA Network

Key Takeaways

  • There is a clear and widely held view that Congress must take action to help the people of Puerto Rico resolve its major debt crisis.
  • Some creditors, particularly hedge funds, could make more money if extreme austerity measures are imposed. If Puerto Rico is allowed to declare bankruptcy, hedge funds will lose some potential profits.
  • While some creditors are fighting for higher returns, the people of Puerto Rico are enduring the effects of severe budget cuts and tax increases. Any path forward should be viewed in light of who wins and who loses.
  • Any potential financial control board should not be compared to the one previously used in Washington, D.C. A more accurate comparison is Flint, Mich., where lead-poisoned children represent the real effects of austerity.
  • Imposing a control board without granting Puerto Rico bankruptcy protection will not address the debt crisis.

Key Quotes

Committee Ranking Member Raúl M. Grijalva during a question:

“The comparisons to DC are a little off.  In fact, I don’t think that’s the right comparison.  When we talk about control boards, we should be comparing Puerto Rico to Flint, Michigan.  Flint is a fitting example of what happens when a controlling authority pursues reckless austerity.

Bloomberg Government recently released an analysis of lobbying data and found that in the 2nd and 3rd quarter of 2015 alone, over $47 million was spent lobbying on Puerto Rico issues. That number gives you some idea of the scale of the profit at stake here. The businesses spending this much money on lobbying see this level of spending as a worthwhile investment to pad their profits, which must therefore be significantly bigger. And a dollar that goes to hedge funds or other investors is a dollar that doesn’t go to schools, nurses, and police and fire protections.”

Subcommittee Ranking Member Pedro Perluisi in his opening statement:

“Unlike the states, Puerto Rico has no authority under federal law to restructure any of its debt.  There is a virtual consensus among objective observers that Congress should grant Puerto Rico such authority, a measure that would cost the federal government and U.S. taxpayers nothing.”

Eric LeCompte, Executive Director, Jubilee USA Network, during his testimony:

“In the short term, the reality is Puerto Rico can't cut its way out of this crisis. It can't tax its way out of this crisis. There is no path to economic growth for Puerto Rico that doesn't include debt restructuring. Self-imposed austerity in Puerto Rico is already proving harmful and counter-productive. Funding for law enforcement has dropped three years in a row. Special education teachers are no longer being paid, directly harming some of the most vulnerable kids on the island. Two hundred schools have closed. Puerto Rico cut its health spending by $42 million this year. This takes place as the Zika virus now spreads in Puerto Rico.

These types of measures push more people on the island to leave for the U.S. mainland, which further erodes Puerto Rico's tax base. It's a cycle that's only getting worse.”

Simon Johnson, Professor of Global Economics and Management, MIT Sloan School of Management in his testimony:

“The biggest danger for Puerto Rico is that there will be no comprehensive debt restructuring. Without further Congressional action, the terms on some loans will be changed, but only partially and likely not enough to return the territory to fiscal sustainability. One potential historical parallel is Latin America during the 1980s. Following a debt crisis that began in 1982, there was a long period of stagnation – until the U.S. Treasury helped to facilitate a restructuring at the end of the decade.”

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