Treasury Official Urges Solution for Puerto Rico
A senior Treasury official urged Congress on Thursday to help Puerto Rico restructure its debt quickly, warning that failing to do so would lead to a decade of financial decline.
But some lawmakers questioned the Treasury’s approach, saying it might not help Puerto Rico in the long run and could even be financially harmful to some states.
Antonio Weiss, counselor to Treasury Secretary Jacob J. Lew, said in testimony before the House Natural Resources Committee that time was running out for the island. It has big debt payments coming due in May and July, and not enough money to pay.
By law, contracts — including bond pledges — cannot be unilaterally broken except in bankruptcy, but as a United States territory Puerto Rico has no standing to seek protection under bankruptcy statutes.
So Mr. Weiss called on the lawmakers to enact a special law that would give Puerto Rico a bankruptcylike framework for reducing its debts — and to do so quickly, before the big bond payments come due and send Puerto Rico into default.
“The is not a Band-Aid. This is a lifesaving procedure that we are discussing,” he said in a hearing. “Puerto Rico’s very survival is at stake.”
Fiscal experts raised similar issues in another hearing on Puerto Rico on Thursday, by the House Financial Services Committee’s subcommittee on investigations and oversight. Committees in both the House and Senate have been weighing how and whether to help Puerto Rico. Paul D. Ryan, the House speaker, has set a deadline of March 30 for a bill that would address the island’s troubles.
Some members of the House Natural Resources Committee said they had deep concerns about a broad debt restructuring, because as currently planned it would affect even general obligation bonds — those backed by Puerto Rico’s “good faith and credit” pledge. For years, this type of bond has been considered virtually default-proof — at least until Detroit went bankrupt, defaulted and dealt significant losses to holders of its general obligation bonds.
In Puerto Rico, general obligation bonds are given top priority by the Constitution. The island has struggled to keep paying that type of debt, even as it has defaulted on other bonds. But Mr. Weiss said that a $2 billion payment due on July 1 includes general obligation debt, and if Puerto Rico cannot pay, crisis will follow.
The restructuring regime that the Treasury envisions would prevent creditors from pursuing claims in a default, including on general obligation bonds.
But the 50 states have consistently managed to repay their general obligation bonds on time since 1933, when Arkansas was the last state to default on such bonds, and some lawmakers said allowing Puerto Rico to break its pledge would raise doubts about other states.
“If we rewrote the rules on Puerto Rico’s sovereign debt now, what would that do to the sovereign debts of the 50 states?” asked Representative Thomas McClintock, Republican of California. He said the states could now borrow at low and affordable interest rates because investors know it is next to impossible for them to default on general obligation debt.
“I’m afraid the credit markets are going to say, ‘Wait a second. If they can do that to the Puerto Rican debt, they can do that for California and Illinois and New York,’ ” Mr. McClintock said. “And markets will respond to that by assessing this additional risk, and increasing interest costs to reflect that risk. That could sink a state like California.”
Mr. Weiss said the Treasury had analyzed the issues carefully and concluded that the markets already understood that a broad debt restructuring for Puerto Rico was necessary, and had priced it into what investors were willing to pay for Puerto Rican bonds; the prices of the states’ bonds had not tumbled as a result of Puerto Rico’s troubles.
But Mr. McClintock said he still believed the markets would punish the states if Puerto Rico got an easy way out and called the Treasury’s restructuring proposals “reckless.”
Other lawmakers said they wanted to know which obligations would have priority in the coming debt restructuring: the pensions due to Puerto Rico’s government retirees, or the principal and interest payments due to Puerto Rico’s bondholders.
Mr. Weiss said it was not the Treasury’s view that public pensions “should be prioritized above everything.”
“But I do need to say, these pensions are completely unfunded, and we are deeply concerned that they be protected,” he said, adding that the pension system on the island had only about 2 cents for every dollar of benefits it was supposed to pay to roughly 330,000 retirees. “That is a completely unheard-of funding ratio.”
The New York Times, citing a draft of a broad plan being put forward by the Treasury, reported on Thursday that the plan would put pension payments to retirees ahead of payments to bondholders.
The committee chairman, Rob Bishop, a Utah Republican, asked Mr. Weiss if, given the gravity of the situation, the Treasury thought there were “any sacred cows” that should be a part of the negotiations. “Is anything so sacrosanct that it cannot be discussed by any kind of oversight board or institution seeking a solution?” Mr. Bishop asked.
“I would not want to put at risk the payments that are due to pensioners,” Mr. Weiss said. “Fundamentally, we think that this has required enormous sacrifice on the part of the people of Puerto Rico, and that all of us who are part of the solution should work in an open-minded way to construct something.”
The Treasury also wants Puerto Rico to have an oversight board, to monitor its budgeting and fiscal planning and make sure it issues truthful financial statements on schedule. Mr. Weiss said the two provisions — for a restructuring regime and for an oversight board — were both essential.
Treasury Official Urges Solution for Puerto Rico
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