Puerto Rico’s Government Development Bank’s investments best represent the country’s out of control borrowing and misuse of contractual guarantees. The Bank is responsible for managing the 72-billion-dollar debt that the country has accumulated. It could be said that the bank is the dam holding back the flood of defaults. The most outspoken critics of any form of relief to Puerto Rico point to the Bank’s poor management and politically motivated lending decisions as the prime reason for the crisis.

Running the bank is Melba Acosta Febo an attorney and Harvard-trained accountant. Financial experts in the field of municipal debt hold her in the high regards. I think she is more a pragmatist than a politician. Ms. Febo acknowledges the bank’s failure to properly securitized the viability of many of is costliest financial decisions. Ms. Febo has performed feats of magic in making cash appear to satisfy debt payments. Yet, she understands that Puerto Rico’s financial problems will not be resolved by accounting sleight of hands. Puerto Rico needs billions in cash to meet its debts obligations, and Ms. Febo knows this better than anyone else.

While being interviewed in late November, Ms. Febo acknowledged that some of the Banks’ lending decisions were incomprehensible. In her opinion, those decisions were primarily responsible for the Island’s fiscal woes. During the free-wheeling interview, Ms. Febo stated that extraordinary measures to free up cash for debt payments could not be sustained. She questioned the appropriateness of the government’s payment of 200 million in holiday bonuses during a financial crisis. Her tone and demeanor contradicted her belief that the bonuses would lead to a real increase in consumer spending.  Ms. Febo intimated that Puerto Rico’s politicians had marched the country towards financial ruin.

Presidential candidate Bernie Sanders and U.S. Senator (D-VT) quickly weighed in on the debate over aid to Puerto Rico. He argued principally that the Island should be given access to court-supervised debt restricting, in another word, bankruptcy protection. In a letter dated October 15, 2015 and addressed to Treasury Secretary Jack Lew, Sen. Sanders urged that the Island’s austerity programs come to an end. He also suggested in his letter that the contractual terms of the debt be reviewed by an independent auditor. It appears that the Sen. Sanders believed that “Wall Street investors” might have taken advantage of Puerto Rico’s officials in securing favorable bond terms.

I do not think that the government officials who negotiated Puerto Rico’s debt would view themselves as inferior to their counterparts who represented the bond purchasers. Sen. Sanders must know that Gov. Gracia-Padilla’s education and work experience are impeccable. Mr. Saunders, an astute politician with a liberal agenda, failed to offer any evidence of overreaching by the investors in Puerto Rican debt.

Wha is clear is that Sen. Sanders believes that the holders of the debt should bear the loss for Puerto Rico’s duly elected officials’ imprudence. Yet, many of the holders of the island’s debt are ordinary non-wealthy Americans just like the Island’s Puerto Ricans that Mr. Sanders argues need protection. Unlike many advocates for wide-ranging relief for the Island, Bernie Sanders does not discuss Puerto Rico’s  status as a U.S. territory as being a cause of the financial problems.

Not everyone believes that a bailout of Puerto Rico is a good idea. Rachel Greszler, Senior Policy Analyst at the Heritage Foundations, writing in the Heritage Foundation’s Brief Issue, December 2015 issue argues against setting the wrong precedent. She advances the position that the Island’s problems are due to decades of harmful policies, out of control government spending and just plain old fashion corruption. She argues that bailing out Puerto Rico would open the door for many municipalities to ask states or the federal government for relief from billions in debt.

Ms. Greszler lays out a compelling case against any bailout. She supports her arguments with solid financial data. Her discussion of the fallacy of allowing the Island to declare bankruptcy is on point. The U.S. bankruptcy laws specifically deny bankruptcy protection to territories. Puerto Rico’s own constitution protects bondholders of Commonwealth debt by backing the bonds with “the full faith and credit and taxing power of the Commonwealth.” This constitutional provision along with the bonds being completely tax-free was the principal reasons why the bonds attracted investors. She argues that it is unfair to now require the bondholders to lose a substantial part of their investment just because Puerto Rico’s politicians used the money to mollify their constituents.

Jonathan Mahler and Nicholas Confessor in “Inside the Billion-Dollar for Puerto Rico’s Future,” which appeared in the New York Times Politics section on December 19, 2015, discussed this very point. According to the writers, high-ranking government officials from Puerto Rico met with executives of some of America’s largest hedge funds in New York City. The officials convinced the executives that their funds should lend the island an additional three billion dollars. With what the officials were offering, it did not take much convincing to induce the executives to come abroad. The American companies would receive a 20% return on their investment and, the debt would be completely free of any tax incidence. In my opinion, the Wall Street investors were won over by the Puerto Rican law that would give them priority in terms of repayment.  It is safe to conclude that Puerto Rico would not have received any additionally financing if there was a possibility that it (its municipalities) could declare bankruptcy. The terms of the bond offerings were negotiated at arm’s length.

Most pundits believe that Congress will pass an aid package upon returning in January 2016 from recess. No one believes that this aid will be in the form of a blank check. The Governor of Puerto Rico says that he welcomes help from the mainland as long as Puerto Rico’s political autonomy is respected. He will be very disappointed with the terms of any aid package. Washington will not allow Puerto Rico’s politicians free rein in the use of any aid given.  In exchange for help, Puerto Rico will have to agree to financial and political reforms along with some form of mandatory oversight. Some decision-making powers will be transferred from Puerto Rico’s government to Washington. If Puerto Rico’s politicians object to the terms of the assistance, they can manage the crisis on their own.

I pointed out in a earlier post, A New Beginning or End for Detroit, that the bailout of Detroit and its later bankruptcy filing would cause a drastic shift in political power. Just like the politicians in control of Puerto Rico, Detroit’s “finance at any costs politicians” pushed the city into insolvency. They then demanded financial assistance, which they planned to administer. However, the politicians in Lansing Michigan did not trust Detroit’s lawmakers with billions of state money in their hands. Borrowers of money cannot dictate the terms of the loan. Puerto Rico’s lawmakers should not forget this maxim. No assistance will be given to Puerto Rico without some strings attached.

It is unlikely that Congress will grant the Island the right to declare bankruptcy. It is just as unlikely that Congress enact a bailout package that will substantially pay off the Island’s outstanding debt. The best that Puerto Rico can expect from the mainland is some aid to help it stay afloat long enough to straighten out its finances. Lawmakers in Washington do not want to transfer wealth from average mainland Americans who invested in Puerto Rican obligations to the people who mismanaged the Island’s economy and abused its power to borrow. The burden of resolving Puerto Rico’s financial crisis rests with its citizens and no one else.