A recent American Enterprise Institute commentary said that a cramdown process will penalize those not responsible for the fiscal problems confronting Puerto Rico, weaken commonwealth incentives to adopt fiscal and governance reforms and increase future borrowing costs for the island and for the overall municipal bond market. Additionally, cramdown will encourage future intransigence on the part of everyone and increase rather than reduce the politicization of the municipal bond market, according to the commentary. In contrast, under a compromise solution, a collective action provision would be implemented for each class of claims, according to the commentary. Under such a compromise, the commonwealth would have the power to bind holdouts within a given creditor class once a majority or supermajority of the creditors in that class (weighted by the value of holdings) agrees to a proposed restructuring of the debt. Such collective action approaches have proven effective at driving competing interests toward reasonable compromises in debt restructurings, but the commonwealth has resisted this approach thus far because it does not involve the sort of cramdown that bestows huge advantages upon the debtor.
