Debt-ridden Puerto Rico got a bit of good news on Tuesday when the Puerto Rico Electric Power Authority and its nervous creditors reportedly moved towards a deal that would permit the utility to pay bondholders more than $400 million as a down payment on its debt.
As The Wall Street Journal reported, analysts feared that a default by the utility would have foreshadowed defaults by other public institutions within the commonwealth, which is saddled with about $72 billion of outstanding debt.
Unlike Detroit and scores of other municipalities and U.S. state-affiliated authorities in fiscal trouble, Puerto Rico can’t avail itself of federal bankruptcy protection to expedite a wholesale restructuring of its debt and simultaneously deal with creditors. Under Chapter 9 of the federal bankruptcy law, only a "municipality" may file for relief -- meaning a political subdivision or public agency or instrumentality of a state. Commonwealths or territories of the U.S. are not covered.
Earlier this week, Democratic Sens. Chuck Schumer of New York and Richard Blumenthal of Connecticut announced they would introduce legislation to extend Chapter 9 federal bankruptcy protection to Puerto Rico, despite strong opposition from some Republicans and lukewarm support from the Obama administration.
The bill would be a companion to one introduced in the House by Pedro Pierluisi, Puerto Rico’s Democratic non-voting member of Congress. That proposed legislation has been backed by Minority Leader Nancy Pelosi (D-CA). Schumer, who is in line to succeed Harry Reid as the next Democratic leader in the Senate, said that he and Blumenthal are in the market for a Republican co-sponsor to try to move the bill after Congress returns from the July 4th recess.
“Senator Blumenthal and I will introduce this bill either way, but we are hoping to get Republican co-sponsors to make this bill bipartisan” Schumer said Tuesday in a statement.
In a televised speech on Monday, Alejandro Garcia Padilla, Puerto Rico’s beleaguered governor, acknowledged that – like Greece – the commonwealth is in the throes of its worst financial crisis in modern times. A combination of years of profligate spending, unwise borrowing to close huge gaps in the budget, high unemployment and poverty on the island of 3.6 million people has generated more municipal debt per capita than any U.S. state, The New York Times observed. Padilla called for a major debt restructuring that would force creditors to take a substantial haircut.
White House Press Secretary Josh Earnest this week strongly ruled out a federal bailout but said that Congress should consider granting Puerto Rico the ability to declare Chapter 9 bankruptcy.
“Puerto Rico currently has no access to a tested restructuring regime for any of its public debt,” Earnest told reporters. “So there are strong merits to having an orderly mechanism for Puerto Rico to manage the financial challenges of its public corporations if needed. And so we’ve urged Congress to take a close look at this particular issue.”
Last month, Puerto Rico hired Steven W. Rhodes, the retired federal judge who skillfully oversaw Detroit’s massive bankruptcy case. Puerto Rico officials are also consulting with a group of bankers from Citicorp who advised Detroit on a $1.5 billion debt exchange with some of the Motor City’s creditors. Rhodes told The New York Times that Chapter 9 is needed for the commonwealth in responding to its debt crisis.
Efforts to extend Chapter 9 to Puerto Rico likely will face strong resistance from some conservative Republicans who have argued that allowing it to restructure its debts in bankruptcy court would be tantamount to forgiving decades of mismanagement by local government officials.
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