The debate resumed in Washington this week over how to handle the impending financial collapse of Puerto Rico’s government, one that could reverberate throughout the U.S. municipal bond market.
Given House Speaker Paul Ryan’s March 31 deadline for passing a bill to address Puerto Rico’s huge debt crisis, two congressional committees held Capitol Hill hearings Thursday on possible legislation.
But a sharp divide quickly became evident between Republicans and Democrats.
President Obama’s point man on Puerto Rico, Treasury Department official Antonio Weiss, urged the House Natural Resources Committee to immediately approve a special “super-bankruptcy” provision for the U.S. territory that would allow the island’s government to restructure $72 billion it owes to bondholders.
GONZALEZ: 'IT'S TIME TO GET REAL' AND LET PUERTO RICO DECLARE BANKRUPTCY
There will be “cascading defaults and litigation” if quick action is not taken, Weiss warned, and a “real risk of another lost decade (for Puerto Rico), one more damaging than the last.”
With $400 million due to bondholders on May 1, and a pressing July 1 deadline for another $2 billion, Weiss called the current debt level for the island “not sustainable.”
Counselor to the Secretary of the U.S. Treasury, Antonio Weiss, urged lawmakers to approve a special "super-bankruptcy" plan for Puerto Rico.
And that’s only part of the problem, he noted, because the island’s public employee retirement system has only 4% on hand of the $46 billion it has promised in pensions to workers and retirees.
“I don’t think we should take any action until we truly know the audited financial picture,” said Rep. Jeff Duncan (R.-S.C.). Duncan noted that Puerto Rico has still not provided independent financial audits from 2014.
Several Republicans on both panels echoed warnings from the financial industry that granting bankruptcy provisions to Puerto Rico will spark a loss of confidence in municipal bonds generally and raise the cost of borrowing for mainland cities and states.
Weiss disagrees.
“Municipal bond investors tell us that an orderly restructuring under federal guidelines . . . is the best outcome for municipal markets,” he said.
The other contentious issue for both panels was what kind of financial oversight to establish for Puerto Rico. Some Republican leaders are urging a strong control board similar to those that managed financial crises in Detroit and Washington, D.C.