Puerto Rico Needs To Restructure All Of Its Debt, Says Ravitch And Others

Summary: Mr. Ravitch and liberal members of Congress apparently see no difference between a U.S. municipality seeking protection in federal court and a U.S. state or possession doing the same. Congress approved the Commonwealth’s Constitution after residents ratified it in 1952. Puerto Rico has a unilateral right under current law to become the 51st state. A default on the singular direct debt of the Commonwealth, a direct violation of its Constitution, would damage the foundation of U.S. public finance and financially neuter the Commonwealth. COFINA is the tsetse (large blood sucking) fly in the ointment to cure the Commonwealth’s massive circumnavigation of its Constitutional debt limit.

That position is a blatant appeal to better the bargaining position of institutional investors at the expense individual investors who largely hold Commonwealth GO’s, not bonds issued by the various corporations created by the Commonwealth.

Richard Ravitch is a former NYS LT Governor, Chairman of its MTA and prominent Wall Street advisor during the NYC financial crises of the early 1980’s. He oversaw one of the MTA’s largest improvement projects. It was funded with MTA service contract bonds sold in the billions. One of the many forerunners to the original appropriation/optional pay bonds next described.

He thinks a Commonwealth GO bond default is part of the solution, and compares it to NYC’s GO note default in the mid-1970s and investor’s acceptance, as payment in lieu of cash, of bonds maturing over eight years.

The NYS Municipal Assistance Corporation for the City of New York was created to issue those bonds, aka MAC bonds. In spite of the window dressing like sales taxes or income taxes, those bonds and the more recent NYS Income Tax bonds are optional pay appropriation bonds. Just read the first page of their official statements. Many states have followed suit.

Mr. Ravitch and liberal members of Congress apparently see no difference between a U.S. municipality seeking protection from creditors in federal court and a U.S. state or possession doing the same.

First, a municipality or state corporation cannot seek protection in bankruptcy without the applicable state’s approval. Some states allow it, others do not.

Under the U.S. Constitution, states are sovereigns but have no power to print money; state law takes a back seat to federal law and the federal constitution when in conflict.

This sounds an awful lot like Puerto Rico. Congress approved the Commonwealth’s Constitution after residents ratified it in 1952. Puerto Rico has a unilateral right under current law to become the 51st state, subject only to a majority vote of residents who are U.S. citizens by birthright.