Puerto Rico and the Bond Market: An Unpleasant Truth Ever since Detroit filed on July 18, 2013 for protection of Chapter 9 of the Bankruptcy Code, municipal bonds, especially those of Puerto Rico, have taken a beating. According to Bond Buyer of October 24, 2013, PR muni yields have “spiked since a front page article on the commonwealth’s finances in Barron’s on August 26.” Some of them have effective interests rates well over 8%. This has awoken an interest in the financial media in the island’s economy. Although the market for PR munis has stabilized after the October 15, 2013 Government conference call, the yields are still high. With $70 billion in debt, a dwindling population and stagnant economy investors are now pondering the possibility the island could be unable to pay its debt. This is reflected by an increasing call for Washington’s involvement in PR’s finances. The Economist in its October 26 issue calls for Washington to “provide interim finance assistance to assist restructuring, much as the IMF does elsewhere.” Barron’s Income Investment of October 24 mentions that CITI is encouraging the FED to introduce a program similar to the Temporary Liquidity Guarantee Program and Long-Term Temporary Refinancing Operations or providing Puerto Rico access to the Federal Reserve’s discount window would restore investor confidence in the island’s bonds. The problem with this type of thinking is not only the moral hazard issue but also the impossibility of Congress or the President providing this relief to the unincorporated territory of Puerto Rico when it has done nothing for Detroit, to say nothing of financially strapped states. What then, can be done? In 1995, Washington DC was on the brink of being insolvent and as PR, none of its subdivisions is eligible for Chapter 9 protection, see, 11 U.S.C. § 101(52). Congress enacted the D.C. Financial Responsibility and Management Assistance Authority, better known as the Financial Control Board that managed Washington DC finances from 1995 to 2001, see, http://www.washingtonpost.com/wpdyn/content/article/2011/01/30/AR2011013 003901.html The Board held the power to enact or override many of the actions of the mayor and helped straighten its finances. Can the same be done with Puerto Rico? Article I, section 7(17) of the Constitution gives Congress the power “To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States . . .” This was the basis of Congress’ creation of the Board. Puerto Rico, since at least 1901 has been considered an unincorporated territory of the United States, see, Downes v. Bidwell, 182 U.S. 244 (1901). Article IV, section 3(2) of the Constitution states that “The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States; and nothing in this Constitution shall be so construed as to Prejudice any Claims of the United States, or of any particular State.” A perfunctory reading of these two sections shows their similarity. Moreover, in Harris v. Rosario, 446 U.S. 651 (1980) the Supreme Court
