Betsy Ross, add another star…for $70 billion dollars

Puerto Rico pleads for a bailout to their debt crisis.

Puerto Rico is in some serious financial troubles.  The island has been in a recession since 2006.  In attempts to get out of their debt, Puerto Rico now plans to become a state.  Currently, Puerto Rico has over $70 billion in debt, and if they were to join as a state they would receive help in restructuring and paying off their current deficit.

Wait—would this mean that the other states would have to take on a $70 billion dollar debt to allow this to happen?  The answer is yes and no.  Where the situation is not the same as the debate that occurred during the founding of the United States, the Federal government would receive $10 billion in funding per year as well as allowing municipalities and government agencies in Puerto Rico to file for bankruptcy.

The same knee-jerk reaction for many U.S. citizens to be against acquiring a territory as a state with such a high level of debt was debated a few hundred years ago between the Federalists and the Anti-Federalists.  Alexander Hamilton led the charge during the founding as the first Treasury Secretary of the United States.  Hamilton, along with many other supporters, convinced congress that the assumption of the state debt would be a good thing for the national government.  Hamilton argued that “a national debt, if it is not excessive, will be to us a national blessing.  It will be a powerful cement of our Union.”  The key phrase in this quote is definitely one that has been overlooked in the last few decades of this country— “if it is not excessive.”

The numbers are excessive and if we were to ask Hamilton for advice on Puerto Rico, he may offer quite the lecture. 

Hamilton did not wrote these words to encourage the country taking on debt as a typical practice.  Instead, he believed that by paying off the debt our country would gain respect and legitimacy to the new democracy to the west.  Back in the late 1780s, the debt was in the mere millions and a necessity to secure our freedom from Great Britain.  Oh, if Hamilton could see our country today.

Currently, our national debt is close to $20 trillion and rising every day.  Assuredly, this number is much higher than what Hamilton defined as excessive.  Over the last 40 years, the debt has continued to rise.  The strange thing is that since the 1960s, local and state debts have remained relatively stable compared to the federal debt.   The numbers are excessive and if we were to ask Hamilton for advice on Puerto Rico, he may offer quite the lecture.

The debt of the states was taken in so that the burden of freedom would be equally yoked between the 13 colonies.  Besides, it would not be fair to cut Maine a break simply because it was left mostly untouched in the war.  Where Hamilton advocated for the equal distribution of debt, the situation is much different today.

The Revolutionary war was fought by the 13 colonies together.  It was a fight that during, and after the importance was on the colonies staying united.   Unlike the revolutionary war, Puerto Rico has been a territory since 1898.  It was acquired as a peace settlement after the Spanish-American War.  Since that time, they have elected to remain a territory of the United States—or at least as the Huffington Post puts it, the votes have not been strong enough to convince congress that the vote amounted to a statehood mandate.  The benefit that many Puerto Ricans see is that they have the freedom to run their government without much federal oversight.

The island is not attempting to get a complete discharge of the $70 billion debt; instead they are only looking for the legal ability to restructure.

Puerto Rico has already announced a planned election to choose 2 senators and 5 representatives to the U.S. Congress.  The movement is not new with the turn into the 2017 year.  Instead, in 2012 Puerto Rico sent out a referendum to determine the preferred political status of the territory.  Where 54 percent of the population is unhappy remaining a territory for the United States, 61 percent would rather be a state than to be any other form of independence.  This movement has been in effect for years.  The previous Governor, Alejandro Garcia Padilla, informed CNN that the island is not attempting to get a complete discharge of the $70 billion debt, instead they are only looking for the legal ability to restructure.  Basically, they want lower interest rates and extended loan terms.

The newly elected governor, Ricardo Rossello, started his new office with a push to haul the country out of their economic crisis.  Like his father before him, he pushes for statehood for the betterment of the Island.

However, the battle is two-sided.  Where many Puerto Ricans hope that they are accepted as the 51st state, some hedge funds oppose the move vehemently.  The hedge funds are guarded against Puerto Rico becoming a state because then it will be one step closer for them to get the power to declare bankruptcy from congress.  In the past, these same hedge funds have lobbied to have the bankruptcy power restricted from Puerto Rico.

Puerto Rico bonds, which majorly make up the hedge funds, are tax exempt and provide around a 20 percent return.  If they were allowed to declare bankruptcy however, the bonds would be forgiven and basically useless or the interest rates would fall and the bonds would be less profitable.

Where the debt shouldn’t be completely absorbed by the federal government, something should be done to save this territory from an extended stretch of poverty. 

What the hedge funds do not realize is that the island of Puerto Rico is falling deeper into dangerous waters that might tragically alter their bonds altogether.  Already, the Army National Guard’s 7,200 troops are stationed on patrol in the crime-ridden island’s streets in order to keep tourists and citizens safe.  If the bonds are not altered soon, those troops would also need to take up duties of unpaid police officers since the government would essentially be on a complete shutdown.

A complete government shutdown would drive Puerto Rico into a scenario just shy of complete anarchy.  Foreign Policy put it best by stating “the results of a collapse of vital government health and welfare services to a population that is older and less healthy than that of any U.S. state will be a scandal.”  More than that, if the island gets to that point, there may be something similar to a French revolution or daily “purge” driving fear into the good people of the island.

Where the debt should not be completely absorbed by the federal government, something should be done to save this territory from an extended stretch of poverty.  Even if Marco Rubio himself has to run the books, or Trump has to fly down as the next episode of Undercover Boss, the island needs help—and it needs it fast.

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About Cyrus Corbett V, Associate Editor Emeritus (16 Articles)
Cyrus Corbett V is a 2017 graduate of Campbell Law School and served as an Associate Editor for the Campbell Law Observer during the 2016-2017 academic year. He is from Murrells Inlet, South Carolina and received his Bachelors in Arts in Government from Wofford College in 2014. Since July after his first year of law school, Cyrus has interned at the North Carolina Retail Merchants Association in downtown Raleigh focusing on the Retail Merchants Handbook. His interest is in jurisprudence of the law and negotiation/ mediation.
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