Democrats in the Senate said that they would introduce two bills today to give Puerto Rico broad powers to shed some of its $72 billion of bonds while also giving its public workers’ pensions priority over the bonds, the New York Times DealBook blog reported. The legislation includes ideas that the Obama administration first put forward in October, when senior Treasury and White House officials said that Puerto Rico risked a humanitarian crisis if it did not soon get the power to unilaterally reduce its debt. (As a United States territory, Puerto Rico currently has no ability to file for bankruptcy protection.) Certain elements of the bill will probably meet stiff opposition from Republicans, who control both houses of Congress and who have expressed concern about the fairness and constitutionality of any island-wide debt restructuring. Many investors in Puerto Rico’s bonds acquired their holdings years ago, when the island’s laws made restructuring impossible. The draft legislation proposes to designate Puerto Rico’s public pensions as “senior secured debt,” which is quite likely to be contentious. Some American lawmakers have already questioned whether Congress can change the priorities of Puerto Rico’s pensions and bonds without adverse legal consequences. Read more.
A related Wall Street Journal commentary today called for an independent financial-oversight authority and audited financial statements for Puerto Rico ahead of a “voluntary debt restructuring.” Puerto Rico’s government and agency debt tops $70 billion, and the Obama administration says the commonwealth needs bankruptcy protection. The House Committee on Natural Resources late last week released the rough outlines of its own solution. Both options make it likely that Puerto Rico’s borrowing costs will go up, because both introduce the specter of an unprecedented write-down of at least some debt, according to the commentary. But the House committee seems interested in leaving Puerto Rico with the power to prove itself as a trustworthy borrower. Granting Puerto Rico access to chapter 9 retroactively would change existing contracts, which specify that receivership, not bankruptcy, is the path to follow in the event of insolvency. States are not allowed to declare bankruptcy as New York, California and Illinois, all in dire straits, understand perfectly well. If Puerto Rico is allowed to walk away from its territorial debt, some states will want the same privilege, according to the commentary. Read more. (Subscription required.)
For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.
