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The U.S. has its own version of Greece in Puerto Rico, and the meltdown could be nearly as ugly when it arrives, according to a commentary in Friday’s Wall Street Journal. Puerto Rico Governor Alejandro Garcia Padilla last week admitted the open secret that the territory’s $72 billion debt “is not payable.” Europeans will notice the Greek-like reasons: excessive borrowing, anti-growth policies, human and capital flight, refusal of local politicians to address the failure of entitlement state politics, and the policy damage from Washington, D.C., according to the commentary. While not currently eligible for bankruptcy, the legislative proposals for granting Puerto Rico chapter 9 protection would be painful and carries risks, but an orderly restructuring under a legal framework in federal court is preferable to a creditor brawl that would likely follow a default, according to the commentary. Hedge funds, mutual funds and bond insurers would have to take haircuts for mis-pricing the risk and enabling Puerto Rico’s political mismanagement. Incredibly, yields on the island’s general obligation bonds were as low as 6 percent two years ago — below Illinois and Michigan GO bonds. They are now 12 percent.

The Puerto Rico Electric Power Authority (PREPA) and its creditors were close to a deal Tuesday that would allow the cash-strapped utility to pay more than $400 million to bondholders, potentially staving off what investors feared might be the first default of many from the U.S. commonwealth, the Wall Street Journal reported today. A deal would mark the latest extension to restructuring talks between the cash-strapped authority and its creditors. The potential deal includes an arrangement to help the publicly owned power monopoly make its full payment due to bondholders. PREPA has nearly $9 billion in debt outstanding and has been negotiating a restructuring plan for months with creditors that include bondholders, banks and bond insurers. Analysts had said that PREPA didn’t have the money to make the payment, and investors worried a default by the authority would presage others from the commonwealth, which has about $72 billion in debt outstanding, a greater sum per capita than any U.S. state. Analysts have also said the central government may run out of cash within a month, which could lead to a government shutdown, employee furloughs and other emergency measures. Read more. (Subscription required.)

In related news, Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa) does not see a path forward for legislation allowing Puerto Rico to file for bankruptcy, a potential fix the White House floated on Monday to the territory’s $72 billion debt default, the MorningConsult.com reported today. White House Press Secretary Josh Earnest told reporters that the Obama administration is not considering a federal bailout package for Puerto Rico, but he urged Congress to “take a close look” at allowing the island to restructure its debt through bankruptcy proceedings. Grassley (R-Iowa), who controls the Senate committee with jurisdiction over bankruptcy law, doesn’t see a bill passing any time soon. “At this time, there is no clear path forward,” a Grassley spokesperson said Monday in an email. “What is clear, though, is that bankruptcy isn’t going to solve all of the financial problems Puerto Rico has gotten itself into.” The aide said that Grassley wanted Puerto Rico’s plan to address “all of its underlying financial problems.” Read more.  

In additional political news related to Puerto Rico, Sen. Charles Schumer (D-N.Y.) said yesterday that he will team up with Sen. Richard Blumenthal (D-Conn.) to sponsor a bill that would allow Puerto Rico’s government agencies to file for chapter 9 protection, Bloomberg News reported today. The bill would be a companion to legislation in the U.S. House sponsored by Puerto Rico’s non-voting member of Congress, Pedro Pierluisi. Schumer said that he and Blumenthal are seeking support from Senate Republicans as well. Rep. Nancy Pelosi, the top Democrat in the House, also spoke in support of the bill after the White House urged Congress on Monday to consider the legislation. Lawmakers in both the House and Senate are on an Independence Day recess and will return to Washington, D.C. next week. The island’s main electricity provider, known as PREPA, may default on a $416 million debt payment due today. Read more.

Puerto Rico's governor yesterday called for the commonwealth to be allowed to restructure its debts under U.S. Bankruptcy Code, while a newly appointed adviser to the U.S. territory said it is "insolvent" and will soon run out of cash, Reuters reported yesterday. Governor Alejandro Garcia Padilla, in a televised address, said sacrifice must be shared by bondholders, as he called for Washington, D.C., to allow a bankruptcy debt restructuring. The Caribbean island is struggling to relieve a $73 billion debt burden. It came to a crunch point yesterday after a dire report on its stability by former International Monetary Fund economists was released ahead of key deadlines on Wednesday to repay debt. Former Bankruptcy Judge Steven Rhodes, who oversaw Detroit's historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment yesterday. Puerto Rico "urgently needs our help," Judge Rhodes said. "It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer," he added. Puerto Rico's bonds skidded yesterday as investors sought greater compensation amid the heightened risk. Puerto Rico is not eligible for chapter 9 restructuring under the Bankruptcy Code because it is not a municipality. Rhodes said the island's future hinges on gaining eligibility for debt restructuring, while stressing that bankruptcy would not be a "bailout." Read more.

In related news, the declaration by Puerto Rico’s governor that the island’s $72 billion in debt is “not payable” was not only a warning to its creditors, but also aimed at leaders in Washington, D.C., but the federal response was relatively reserved yesterday, the New York Times reported today. The White House made it clear that Puerto Rico would not receive a “federal bailout” but expressed some support for an effort to allow the island’s public corporations to use federal bankruptcy protections. Puerto Rico is not allowed to authorize chapter 9 bankruptcy as a U.S. commonwealth. But the push in Congress for chapter 9 faces stiff opposition from many Republicans, particularly conservatives, who say that allowing Puerto Rico to restructure its debts in bankruptcy would amount to a free pass for decades of fiscal mismanagement by local government officials. Read more.

The Michigan Treasury will immediately begin a preliminary review of the troubled finances of Wayne County, Reuters reported on Friday. County officials were notified of the action in a letter on Thursday from State Treasurer Nick Khouri. Wayne County Executive Warren Evans on Wednesday asked the state for a fiscal emergency declaration to deal with a chronic budget deficit. Detroit, which is located within Wayne County, exited the biggest-ever municipal bankruptcy last year, shedding about $7 billion of its $8 billion of debt and obligations. Under Michigan law, state officials have 30 days to complete the review of Wayne County that began on Friday. The initial findings will be presented to county officials before a final report goes to Michigan's Local Emergency Financial Assistance Loan Board, which will determine if an in-depth review is warranted to determine if a financial emergency exists.

Puerto Rico's governor confirmed yesterday that his administration recently pursued a proposal to request that the U.S. Congress allow the island's heavily indebted government to declare bankruptcy amid an economic crisis, the Associated Press reported yesterday. Gov. Alejandro Garcia Padilla's public acknowledgement of the proposal comes as the U.S. territory struggles with $72 billion in public debt amid a nearly decade-long economic slump. Garcia said that he has since rejected the proposal in favor of the current push to get rules that would allow only Puerto Rico's public agencies to file for bankruptcy under chapter 9. A U.S. House committee is studying the issue amid growing concerns about the government's ability to repay its debt. Declaring complete bankruptcy for the whole island government would not have been good for Puerto Rico, Garcia said. Pedro Pierluisi, Puerto Rico's representative in Congress, criticized Garcia for pursuing such a proposal in private. "It's an irresponsible move that greatly damages Puerto Rico's image before Congress and the financial markets," Pierluisi said.

Michigan's Wayne County plans to sell nearly $187 million of general obligation limited-tax notes next week, while warning potential investors that it could be headed to federal bankruptcy court, Reuters reported on Friday. The note sale is part of about $8 billion of debt expected to be offered in the U.S. municipal bond market in the coming week, according to Thomson Reuters estimates on Friday. Wayne County said that if its plan to address chronic budget deficits by curbing pension and health care benefits and cutting wages is not implemented, the state of Michigan is likely to appoint an emergency manager, who could recommend a chapter 9 municipal bankruptcy filing, according to offering documents for the note deal. Detroit, which is in Wayne County, exited the biggest-ever municipal bankruptcy last year, shedding about $7 billion of its $18 billion of debt and obligations.

Illinois Comptroller Leslie Geissler Munger said that the state won’t be able to pay its workers, and will have to stop paying Medicaid and end school aid if lawmakers don’t pass a budget in the next three weeks, Bloomberg News reported yesterday. The lack of a spending plan for the year starting July 1 is increasing pressure on Illinois’s already stressed finances, Munger said yesterday. The Democrat-controlled legislature and Republican Governor Bruce Rauner failed to agree before the session ended May 31 on how to close a $6.2 billion budget gap for the coming fiscal year. A solution now requires a three-fifths vote rather than a simple majority. The standoff has intensified the financial crisis and heightened the risk of credit downgrades. Employees would miss paychecks starting July 15 and schools won’t receive aid set for distribution Aug. 10, Munger said. Some payments would continue, including debt, pension, retiree benefits and welfare, she said.

Setting up a possible showdown with CalPERS, two bond firms are reviving their legal campaign to win a bigger share of the money being doled out by bankrupt San Bernardino, Calif., the Sacramento (Calif.) Bee reported today. Luxembourg bank EEPK and bond insurer Ambac Assurance Corp. filed appeal notices to the U.S. Bankruptcy Court Appeals Panel this week challenging San Bernardino’s decision to pay its full pension obligations to CalPERS. Their lawsuit was dismissed last month by Bankruptcy Judge Meredith Jury. The two companies would recover 1 percent of an estimated $59 million debt under San Bernardino’s plan. They say that it’s unfair to pay CalPERS its full annual payment, which exceeds $24 million a year, while repaying them next to nothing.

Puerto Rico wants insurers such as Assured Guaranty Ltd. and MBIA Inc. to guarantee some of the $2.9 billion of bonds that it plans to sell to stave off insolvency, Bloomberg News reported yesterday. The problem is that the insurers’ willingness to participate in the new deal depends on the amount of losses they’re forced to take on $2.6 billion of debt issued by the island’s power authority that they already back, according to Melba Acosta, president of Puerto Rico’s Government Development Bank. Bond insurers pledge to pay investors if a borrower defaults on guaranteed debt or reduces insured obligations through negotiations. “This is sort of their last shot at finding liquidity,” said Daniel Hanson, an analyst at Height Securities LLC, a Washington, D.C.-based broker dealer. If Puerto Rico is able to sell the new bonds “they need to get it done at enough size to avoid coming back to market again.”