As Puerto Rico careens towards a preventable default on its eye watering $73 billion public debt (which is greater than 100 percent of the island’s GDP), Congress would be wrong to play chicken with the island’s debt crisis.
At least twice in recent memory the game of financial chicken being waged in Washington has had dire economic consequences for the U.S. and the world. The most recent example is the political brinksmanship over the debt ceiling and so-called fiscal cliff costing the U.S. its AAA credit rating and hurting the dollar’s credibility as the world’s reserve currency. The second example was in not extending the too big to fail line to include Lehman Brothers leading to the bankruptcy of this systemically important firm. Lehman’s failure triggered a massive financial panic seizing the credit markets – the very lifeblood of America’s consumer economy. If household debt was the powder keg and shoddy financial products the fuse, Lehman’s failure was the spark that ignited the financial crisis of 2008.
While many argue that Puerto Rico’s debt crisis is largely decoupled from the broader U.S. economy, as an American protectorate and dollar denominated market, allowing the island to default would be tantamount to a Lehman moment but on a national scale.