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John E. Sununu

Puerto Rico must remake its finances

The US and Puerto Rican flags flew in Old San Juan.AP

What a difference a headline makes. Last week, as Treasury Secretary Jack Lew dismissed any talk of direct support for cash-strapped Puerto Rico, the Wall Street Journal politely announced, “Lew Says No to Federal Bailout.” Forty years ago, when President Gerald Ford made the same choice for a beleaguered and mismanaged New York City, the Daily News famously declared: “Ford to City: Drop Dead.”

Back then, the Big Apple narrowly avoided bankruptcy — although lawyers brought petitions before the Supreme Court just two weeks before Ford turned down the pleas from Mayor Abe Beam and Governor Hugh Carey. Puerto Rico may not be so lucky. Or, more accurately, the funds that own $72 billion in Puerto Rican debt may not be so lucky. Should the Commonwealth file for protection in the courts — much as Detroit did two years ago — investors stand to lose big. Still, the question remains: will Congress let them do it?

Unlike states, cities, and counties, the territory of Puerto Rico does not have access to Chapter 9 bankruptcy protection. Congress could change that with simple legislation, but the policy — and politics — behind such a move make navigating a path for the tiny island treacherous at best. Aside from presidential candidate Jeb Bush, no prominent Republicans have yet endorsed the idea.

Bankruptcy protection rewards bad behavior by allowing Puerto Rico to walk away from financial responsibilities without making real changes to the policies that created this fiscal disaster in the first place. Enacting bankruptcy laws now is also tantamount to changing the rules in mid-game. As an alternative, politicians and some investors are backing a financial control board not unlike the state-created Emergency Financial Control Board that held extraordinary power following New York City’s financial crisis.

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In that regard, New York looks something like a model for reform. Disastrous mismanagement during the 1960s and ’70s spawned a generation of reform-minded leaders: Ed Koch, Rudolph Giuliani, and Michael Bloomberg. They changed the way New York did business in everything from financing to policing to public schools. Ironically, Bill DeBlasio, New York City’s current mayor, has moved the city sharply away from his predecessors’ reform agenda — and strongly supports federal assistance for Puerto Rico as well.

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If all this sounds strangely Greek, it should. Like Puerto Rico, Greece’s lenders had no interest in default. They wanted to keep Greece in the Eurozone and extend payment terms in exchange for reforms to tax, pension, and labor laws. Equally important, they wanted to send the message to countries like Italy and Spain that there would be no easy way out from under their ever-expanding debts. In the end, creditors won, the Greek Parliament passed several packages of reform legislation, and the country’s debts have been restructured.

And that’s really the fundamental question for Congress. What approach will best ensure the badly needed reforms to Puerto Rico’s bureaucracy, public works, and pension laws?

And for Puerto Rico, the question is: how will it use this moment? If bankruptcy filing is simply seen as a way to avoid hard choices, it represents the wrong path for everyone. Under the crushing debt burden, Puerto Rico’s economy has contracted for eight consecutive years. Yet during that same time, while the number of students fell nearly 40 percent, the number of teachers went up. Such mismanagement would be comic if the consequences weren’t so tragic.

No one is telling anyone to drop dead here — in fact, Ford never actually used the words either. But reform, not bankruptcy, is the key to Puerto Rico’s economic future. If the island can’t get the job done, then Congress should create a financial control board that will do it for them.

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John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Globe.

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