As Puerto Rico faced a fiscal crisis last year after racking up $123 billion in debt and pension liabilities, Congress passed special legislation to give it relief from creditors and time to find its financial footing. Now, with Washington, D.C.’s help needed perhaps more urgently, a key piece of that legislation is hampering efforts to address the lingering effects of Hurricane Maria — and possibly threatening Puerto Rico’s broader economic comeback as well, the New York Times reported. Two contentious events this week — a court ruling and a day of hearings on Capitol Hill — have brought the fundamental challenge into sharp focus: Even in an emergency, federal officials have limited say over how Puerto Rico conducts its affairs. The special legislation, known as PROMESA, placed Puerto Rico under the oversight of a federal board and subjected its debt to a court-supervised restructuring. The law patched together provisions reflecting the island’s status as a self-governing United States territory and parts of chapter 9, the federal bankruptcy code covering local governments. Among other things, chapter 9 greatly limits the authority that bankruptcy court judges and other federal officials can exert over insolvent local governments. Despite that aspect of chapter 9, which prevents the imposition of tax increases or pension freezes in bankruptcies involving cities like Detroit and Stockton, Calif., Congress chose to incorporate it into PROMESA. The implications of that move are becoming clearer as relief efforts in Puerto Rico sputter along compared with the smoother federal responses this year to hurricanes in Florida and Texas. Read more.
In related news, investors have unloaded the Puerto Rico’s bonds at the fastest pace in three years, pushing prices to one new low after another, Bloomberg News reported. The selloff caused at least a fifth of the government’s $12 billion of general-obligation bonds to change hands, a shift that could help hasten Puerto Rico’s emergence from its record-setting bankruptcy. That’s because those who bought near now record lows may be willing to settle for far less than hedge funds and others that rushed in before the financial collapse. “The market’s resetting for the potential for a resolution,” said Rob Amodeo, who manages $25 billion as head of municipals at Western Asset Management. “That’s where the trade is headed and you needed to get there because there’s not enough capital to repay bondholders.” Read more.
