Conflicting Bankruptcy Perspectives Discussed At D.C. Debt Forum
SAN JUAN — Puerto Rico needs a restructuring plan for “all of its debt” through a special legislative act tailored to territories along with a federal control board that does not intervene with the island’s autonomy, to overcome the fiscal crisis, Antonio Weiss, a counselor to the Secretary of the U.S. Treasury, said.
He made his remarks at a forum organized Friday by the Bipartisan Policy Center in Washington D.C.
Weiss reiterated that Puerto Rico will run out of money in June but that there is a need for action “now” to address liquidity problems.
However, Héctor Negroni, the co-founder and co-chief Executive Officer for Fundamental Credit Opportunities, said allowing Puerto Rico to access bankruptcy protection will severely affect the muni-market and create uncertainty. Meanwhile, former Washington Mayor Anthony Williams said the idea of a federal control board to oversee the island’s finances “is not the end of democracy” for the island and that it worked well for Washington D.C. He stressed that Puerto Rico may have to give up some of its powers to get out the fiscal crisis much like a patient who is sick and is forced to change his lifestyle.
David Skeel, a professor of Corporate Law at the University of Pennsylvania Law School, said that for reasons “not clear to everyone” the island was excluded from the Bankruptcy Law in 1984 as the law says it is a state for every purpose except for Chapter 9 bankruptcy protection. Puerto Rico enacted the Debt Enforcement and Recovery Act in 2013, which was struck down by two federal courts as unconstitutional after ruling that it was preempted by the federal bankruptcy statute. The issue is now before the U.S. Supreme Court.
“My suspicion is that this won’t be decided until the summer and by that time, it will be too late,” Skeel said.
He noted that the Republican dominated Congress has been leery of providing debt restructuring to Puerto Rico because “it is a slippery slope for all states…Next thing you know we have Illinois,” he said. However, he noted that the same kinds of arguments Republicans made to grant bankruptcy protections to banks, also apply to Puerto Rico.
“It is a fix for a disaster,” he said.
Weiss said there is a broad consensus that there is a crisis and a restructuring is needed for the entire $70 billion debt owned by Puerto Rico, which is equivalent to its gross national product.
Puerto Rico has 18 different issuers, 20 creditor classes and has already defaulted on four types of debts.
“The debt is unsustainable…Any solution has to look at the entire debt,” he said, adding that the “race to court” has already begun. Puerto Rico was sued by two insurance companies after recently defaulting in some of its debt.
Weiss said that the restructuring plan for Puerto Rico does not have to be modeled after Chapter 9 of the federal bankruptcy law but “a special legislative act tailored for territories. This is not cities or states…It is unrealistic to try to avoid a restructuring.”
He also insisted that a federal fiscal oversight board for Puerto Rico “needs to leave self-governance in place.”
Weiss reiterated that the fiscal crisis in Puerto Rico is also a humanitarian crisis.
While Negroni insisted on the repercussions of a debt restructuring in the municipal market, which helps fund infrastructure projects across the United States, Skeel reminded him that Puerto Rico is not paying its debt already and that a default could be worse.
Weiss said that a decision has to be made between “an orderly restructuring” and a “disorderly restructuring” that will take 10 years for Puerto Rico to overcome.
On the other hand, Weiss and Williams believe Puerto Rico should use the current juncture to address its current political status by asking for parity in federal funds for health and the earned income credit. Negrón said it was “a lot to ask right now” from Congress and that the island should focus on its immediate needs.
Negroni also said Puerto Rico also needs to “reset its mentality” for certain things such as its tolerance for the underground economy, something that would normally not be tolerated in the United States.