The Specter of Puerto Rico’s Debt

Felix Salmon (0:09)

Hello, and welcome to Money Talks from Slate Money, your guide to all things interesting in the world of business and finance. I am Felix Salmon of Bloomberg, and this week on Money Talks, a little show where we talk to the most interesting people in the world, about the most interesting things in the world. I am going to be chatting with bankruptcy expert extraordinaire, Mr. David Skeel. David, welcome.

David Skeel (0:39)

Thank you so much, Felix. I'm looking forward to our conversation.

Felix Salmon (0:43)

So, David, first of all, who are you? Introduce yourself.

David Skeel (0:47)

Who am I and why am I here?

Felix Salmon (0:48)

Exactly.

David Skeel (0:49)

You introduced me pretty well. I'm a law professor. I just finished my 36th year of teaching law. I'm a bankruptcy specialist in particular. I teach at the University of Pennsylvania's law school. And for nearly eight years, I was on the Puerto Rico Oversight Board the last three and a half of those years as chair, which I suspect will be the most relevant detail to our conversation.

Felix Salmon (1:17)

And you were keeping notes this entire time?

David Skeel (1:20)

I was keeping notes. I was keeping them in handwritten journals. I have about 1,500, 2,000 pages of notes.

Felix Salmon (1:29)

Which have now been condensed down into a hardback book available wherever books are sold.

David Skeel (1:35)

That is correct. Yes, it went from 2,000 pages to more or less 300 pages.

Felix Salmon (1:41)

And the name of the book is?

David Skeel (1:43)

Promise Land, the Inside Story of the Puerto Rico Debt Crisis.

Felix Salmon (1:48)

Now, all Slate Money listeners know, I think, at this point, I am kind of obsessed with sovereign debt. Puerto Rico is not sovereign, but it's not not sovereign. It's kind of an interesting edge case. And it was huge. And the first thing we need to say is like, just to get this up front, Puerto Rico declared what was effectively bankruptcy. And I'm sure you're going to tell me that like technically it wasn't, but basically it declared bankruptcy and is still kind of going through this long and painful process. And this was huge. If you add up all of the money owed by the government and by the electricity company and the unfunded pensions and stuff, I think it actually came to what, $120 billion, something like that, like bigger than Argentina?

David Skeel (2:37)

True on both counts. So it was roughly $72-$74 billion of debt, roughly $55 billion of unfunded pensions. Argentina, I think, was about $100 billion. So it was bigger.

Felix Salmon (2:53)

Yeah, this was massive. And I feel like it didn't get quite the level of headlines that Magnitude might suggest. At least in my world, Argentina got a lot more headlines than Puerto Rico did. So like just in and of itself, it's an interesting story because it's so big. And also because it dragged on for so long. But you framed this in the book as not just a fascinating story in its own regard, but also as a sort of cautionary tale, I suppose.

You know, you're looking around a little tour of the horizon here, and you reckon that this is not going to be the last of these things.

David Skeel (3:28)

That's exactly right. I would say it's a cautionary tale in the sense of, if you watched this, if you read this book, don't let it happen to you.

If you're Chicago or Illinois or even a number of sovereigns. And the other thing I would say is it really is a case study for future governmental crises. The next time there is a big governmental crises in this country, in particular, Congress is going to have the same set of options, and they're going to be making the same kinds of decisions.

Felix Salmon (4:01)

And so basically what happened is it became obvious that Puerto Rico's debt was unsustainable. It was going to have to default. And then you go into quite a lot of detail of all of the back and forth in Congress and how Congress eventually allowed or passed a law that allowed Puerto Rico to do something very close to bankruptcy. And at one point, you called the act that came out of it called Promesa, hence the name of your book, a rare and vital illustration of a fully functional political process. So you don't mean that ironically, you actually think that like Congress kind of did the right thing here.

David Skeel (4:36)

I absolutely think they did the right thing. And that's one of the main reasons that I spent a chapter and a half of roughly a chapter book on the legislative history.