Cogito Ergo Non Serviam

Congress Starting to Move on Puerto Rico Debt Problem

The American Commonwealth of Puerto Rico is in debt. It owes $70 billion with a GDP of $103 billion (as of 2013). However, this is somewhat fictitious given its few natural resources, its reliance on tax breaks to attract business, and its current unemployment rate of 12.5% aggravates a 45% poverty rate among its 3.5 million US citizens. The simple fact is that a level of debt that should be manageable (debt-to-GDP below 70) isn't. It has already defaulted on $400 million. A payment of $1.9 billion is due July 1. Congress has finally started work on legislation to avert disaster.

Around midnight last night, the House Natural Resources Committee, which has a great deal of say-so over the island, released details of a third draft of a bill to address the debt problem. The Puerto Rico Oversight, Management and Economic Stability Act (PROMESA, "promise" is Spanish) "seeks to return the island to solvency, rebuild a base for economic growth, and maintain its ability to access capital markets in the future," says Reuters.

Speaker of the House Paul Ryan issued a statement that noted, "Right now, the stability of the U.S. territory is in danger, as the Puerto Rican government continues to default on major loan payments. We have insisted that our response meet basic principles, and first among them is protecting taxpayers from a bailout."

It won't be a bailout. The wire service adds that the bill "keeps language that would allow Puerto Rico to cut repayments to creditors without their consent, known as a 'cramdown'." In other words, those who lent foolishly will have to pay for their folly. The problem is this includes a lot of funds and individual American investors.The politics of this haven't been settled.

Speaking for the House Democrats, Nancy Pelosi said, "After long bipartisan negotiations, we believe we have achieved a restructuring process that can work." That is important because it is hard to tell how the hard-right of the House GOP is going to respond. Mr. Ryan may need to pass the bill with some Democratic votes, the kind of thing that made his predecessor, John Boehner, so unpopular with the Tea Party Faction.

In the Senate, the bill may well face hostility from the majority Repubilcans. Reuters noted, +In the early drafts of the bill, Senator Orin Hatch of Utah, the chairman of the powerful Senate Finance Committee, said he was not satisfied with the legislation, meaning a potential hurdle for passing the bill remains in place." Whether this new version overcomes his objections is hard to say.

Key to the passage of the bill is the creation of an oversight committee that will supervise the restructuring. Puerto Rico's governor, Alejandro Garcia Padilla, doesn't like it as it infringes on the territory's self-governance, but he will benefit from it because he can always blame things that go wrong on the board. Who appoints members and who the members are will be the next big political problem.

The view from investors is summed up by a note from Heights Securities analyst Daniel Hanson. "The bill, which creates a control board and allows for bankruptcy, is highly controversial and does not definitively protect any creditors. We believe the legislation is more positive for both GO and COFINA creditors than the legislation previously under review. Reuters explains "GO, or General Obligation bonds are backed by the full faith and credit of the island and are senior to all debt, while COFINA debt is backed by sales tax revenues."

"But the lack of clarity in the drafting of the bill, especially around conflicting portions within the bill and especially with respect to pension liabilities, means that we are still heart burned over the looming restructuring fight," Hanson said.



© Copyright 2016 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.



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