With both houses passing the “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA), its up to the President to sign the bill and he likely will. While PROMESA may be well-intended, it sends the wrong messages to both public officials, private markets and consumers.

For more than a decade, the Commonwealth has covered its spending by borrowing money and issuing bonds, and did so while pledging its full faith and credit – an unconditional commitment to pay interest and principal on debt. Its spending spree and allocation of political spoils has culminated in over $72 billion in debt, and now its failure to pay its debt obligations highlights the immediacy of the crisis. However, this crisis was long in coming and it was purely a political decision to continue the spending spree, not a fiscally responsible one.

If PROMESA becomes law, the consequences for all will be much worse than letting the current government rein in control of its own budget:

  • The bill will enable Puerto Rico to decide who gets paid and who gets shafted, thereby negating constitutional protections to prioritize its payment of debt;
  • Bondholders, many of whom are retirees from all over the U.S., could receive pennies on their dollar of investment;
  • Other states dealing with challenging budget deficits will get in line in order to shifting their debt obligations to others, instead of responsibly managing their spending;
  • Investors will shun municipal and state bonds to build roads, hospital and other infrastructure, because investors will know that the words “full faith and credit” represent empty promises; and
  • The cause of the Puerto Rican crisis will not have been corrected, only rewarded, which will enable the Commonwealth’s government apparatus to continue doling out political favors to unions and others.

What we are seeing is a program long in the making. To be clear – this crisis was not the result of factors beyond their control; it was self-indulgent spending and record public corruption (including links within the administration), coupled with arrogant confidence that the mainland would one day bailout its fiscal irresponsibly. Those responsible for kicking the “deficit can” down the road were fully aware that Puerto Rico’s constitution prohibited it from declaring bankruptcy. Rewarding bad behavior would be a costly decision. If we ever needed is an example of how big tax and spend policies are ineffective, here is a prime one.

The President should not provide the means for other politicians to sidestep lawsuits and decide who gets pay back and who gets shafted. It was politics that fueled this spending spree, and now, if the president approves PROMESA, Puerto Rico could circumvent constitutional protections that protected consumers from these very political shenanigans. Instead, the Puerto Rican government needs to rein in spending, and Administration needs drop the idea of bailing out governments from fiscal recklessness.

As the hurricane season begins, who will bailout the island if it is devastated by a storm? Will the Commonwealth issue bonds to raise money to rebuild its infrastructure and who would be foolish enough to buy those bonds? Clearly, the precedent that PROMESA creates will be much costlier than its benefits.

It’s time to stop throwing good money at bad ideas – PROMESA is bad for consumers, taxpayers and free markets. Finally, let politicians abide by the laws and face the consequences of their actions. That solution would be good democracy.

In summary, a bailout for the Commonwealth would reward financial malpractice and fiscal irresponsibility, push costs to innocent parties and would only increase the likelihood of another financial bailout. Moreover, it does not correct the reckless spending behavior that led to this very problem. In short, it fuels the tax and spend policies that got the Commonwealth in trouble in the first place, and it establishes a future model for more spending and more bailouts.

For this last reason, we expect the president to sign this bailout into law.