FEW words raise as many hackles in America as “bail-out”. To left and right alike, it speaks of waste and corruption: the exploitation of hardworking taxpayers by the rich and the feckless. That is bad news for Puerto Rico, a small, broke American territory in the Caribbean which missed payments on some of its debt this week (see page 33).

Barack Obama wants Congress to amend its laws to let Puerto Rico declare bankruptcy and to stump up some money to help it through a transition that will inevitably be painful. Righteous lawmakers harrumph that this sort of bail-out would reward the island’s profligacy. Its tattered accounts stem in part from a bloated public sector, unaffordable pension promises, unduly restrictive labour laws and a tax code that is full of holes. They fret, too, that it would set a bad precedent. Many of America’s 50 states have big debts and even bigger unfunded pension liabilities. There is no bankruptcy procedure under American law either for states or for territories like Puerto Rico. If Congress throws Puerto Rico a lifeline, the theory goes, spendthrift places like Illinois will soon request one.

These arguments are unfair. Congress itself lumbered the island’s economy with its biggest burdens. It is Congress, after all, that imposed America’s minimum wage on Puerto Rico, even though local workers are less productive than those on the mainland. Congress has also set some welfare payments at relatively high levels. And, again, Congress imposed costs on Puerto Rico by banning foreign vessels from carrying goods between American ports, making it unnecessarily expensive to ship anything to or from the island.

The rights and wrongs of write-downs

Opponents’ arguments are also impractical. One way or another, the federal government will end up on the hook for the disarray in Puerto Rico. In the past decade the territory’s economy shrank by 14%. Employment is down by 12%. Workers have responded by moving to the mainland, where jobs are easier to find. Over the past decade the population has dwindled by 9%, and the exodus is accelerating. The big spending cuts and tax rises still needed to balance the books would lead even more Puerto Ricans to emigrate, shrinking the tax base yet further.

A write-down, accompanied by measured spending cuts and reforms, would right the island’s finances. Yet unless Congress allows both the territory’s government and its agencies to declare bankruptcy, that will almost certainly not happen. The island’s constitution, which Congress can override, guarantees that certain categories of bonds will be paid in full. Meanwhile, the constitution also protects government pensions—a potential contradiction. Without Congress’s help, a long and messy court battle, accompanied by worsening economic conditions, widespread hardship and mass emigration, seem inevitable. At some point, the federal government would surely have to step in.

As for the argument about precedent, it is not clear that Congress has the power to create a bankruptcy regime for states, which are sovereign entities. Puerto Rico’s laws, by contrast, are more at Congress’s disposal.

Changing them would not just spare the island’s economy grievous harm. An orderly bankruptcy would allocate some losses to bondholders—as should happen when a jurisdiction cannot pay its bills—but might still enable them to recover more money than a protracted legal wrangle. And it would save Congress from shelling out more in federal aid later.