In Puerto Rico this week President Trump made one of his patented off the cuff remarks, saying:
President Trump said Tuesday that the U.S. would have to “wipe out” Puerto Rico’s multi-billion dollar debt after Hurricane Maria.
“They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out,” Trump said during an interview with Fox News. “You can say goodbye to that.”
“I don’t know if it’s Goldman Sachs but you can wave goodbye to that.”
Puerto Rico had roughly $70 billion in debt before Maria hit.
His White House staff promptly backtracked on it:
The Trump administration on Wednesday walked back the president’s apparent vow to wipe out Puerto Rico’s debt, suggesting that the island would have to solve its own fiscal woes despite the catastrophic damage it has endured from two powerful hurricanes.
“I wouldn’t take it word for word with that,” Mick Mulvaney, director of the Office of Management and Budget, said on CNN in reference to President Trump’s suggestion that the United States might clear Puerto Rico’s debt.
Trump’s original remarks reflected a critical truth about Puerto Rico, albeit in his normal, overstated way. The island simply isn’t going to be able to repay its debts, and some form of restructuring seems inevitable. Unlike countries or US states, Puerto Rico is not a sovereign borrower. It can go through bankruptcy or a similar process, one that’s likely to get preference to local residents over out of town investors (cf: Detroit).
As someone who is familiar with the bankruptcy process, Trump knows what’s up here. Even Mulvaney doesn’t seem to be promising full repayment of debts.
The truth is, a lot of people loaned money to Puerto Rico long past the point where it became obvious it probably wouldn’t all be paid back. Just like they continue to loan money at favorable rates to jurisdictions like Illinois and Chicago. Yes, borrowers shouldn’t be borrowing to excess. But it’s also true that lenders have a responsibility to exercise good judgment of the risks of continuing to pour money into these deeply indebted governments and their affiliates.