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What Will It Take to Solve Puerto Rico’s Debt Crisis?

September 1, 2015

By Maurice P. McTigue

How serious was the default by Puerto Rico on its bond obligation? As a member of parliament and associate minister of finance during the recovery in New Zealand during the mid-1980s when the commonwealth almost went bankrupt, I have firsthand knowledge of how difficult recovery is — but I also know that it is possible.

I can tell the people of Puerto Rico that the recovery will be painful. Individuals may find that borrowing is more difficult and expensive. The government may want to tax its citizens more heavily. And the commonwealth’s creditors may be compelled to renegotiate their debt holdings. This is very serious, indeed.

Puerto Ricans may find that many of the government-paid benefits will need to be reduced significantly. In the case of New Zealand, this reduction in benefits was as much as 30 percent. The civil service was reduced by 66 percent. The Puerto Rican government will need to be reduced in size by as much as 40 percent. But the quicker the adjustments are made, the quicker people and the economy can get back on a path to growth. Even then, vigilance will be required to keep fiscal distress from creeping back again — and keep the political class from revisiting its big spending tendencies.

Read the full article at the Mercatus Center: What Will It Take to Solve Puerto Rico's Debt Crisis?

Issue Categories : Budget, Finance & Banking