Monday, October 18, 2021

Time for ‘Plan B’ on Puerto Rico’s Debt Crisis?

By on May 12, 2016

SAN JUAN — As new language in the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) bill makes its way to the public domain amid significant concerns on whether it has enough support to clear Congress, talks of alternate plans to help Puerto Rico manage its debt crisis are still on the back burner.

With seven weeks to go before the commonwealth is due on more than $1.5 billion in commonwealth debt payments, officials for the Barack Obama and Alejandro García Padilla administrations have taken the crisis discourse to higher gear, stressing that Congress is perhaps the only one that can diffuse Puerto Rico’s ticking debt bomb.

Fortaleza US flag

La Fortaleza (Photo: Luis Valentín)

If Congress stalls, and there are no votes [for Promesa], what will happen? Action from the Executive [Branch] will be needed,” House Speaker Jaime Perelló said earlier this week. “Until now, the only plan is to keep pushing for Congress to act. And every time I ask for Plan B, it turns out to be Plan A.”

For his part, Senate President Eduardo Bhatia told Caribbean Business on Monday that while it is a discussion that must be held, “we don’t want to show a Plan B so that those people deciding whether to carry out Plan A have an exit. The idea is to only have Plan A—a restructuring plan that comes with clear guidelines from Congress.”

Later during the week, Bhatia publicly acknowledged that maybe it is time to move beyond Congress and start making decisions at the local level. For the Senate leader, overcoming Capitol Hill’s current divisiveness is already a knotty task, let alone before July 1.

For the past year, sources with knowledge of the situation have let on that the Alejandro García Padilla administration — with the blessing of the U.S. Treasury — have continuously banked on the “humanitarian crisis” discourse as a media strategy aimed at pressing Congress to act on its behalf.

The commonwealth’s past run-ups to large debt-service deadlines have seen advisers, including Treasury’s, recommending to La Fortaleza that it should stop paying its debt if it truly wants to rock Capitol Hill’s inertia, sources say.

Following a $355 million payment made Dec. 1 on Government Development Bank (GDB) debt, Caribbean Business asked García Padilla whether any federal government official had suggested using a full-blown default as a means to achieve congressional action.

“Never, none. Nobody from the Obama administration has ever told me something like that,” the governor said at the time.

Speaking to the media outside the Río Piedras Medical Center (Centro Médico), U.S. Treasury Secretary Jacob Lew conceded this week that “it’s very hard to do things like [achieving congressional action] unless you are at a moment of necessity and sometimes crisis.”

Highlighting the different needs of the island’s health and education services — funding woes that have plagued the island for years — Lew stressed that Puerto Rico is at a moment of necessity and crisis, and so Congress must act now. He also called himself an optimist and argued that progress is being made.

As Promesa 2.0 makes its way to the limelight, three different bills filed in recent months by GOP lawmakers — two of them from Rep. Sean Duffy (R-Wis.) and one by Sen. Orrin Hatch (R-Utah) — have failed to reach markup hearings within their respective committees.

Alternatives to Congress

“Anyone who believes that there is an alternative to [congressional action] is going to be disappointed,” Lew went on to say during his daylong visit to San Juan, adding that the U.S. territory needs a debt-restructuring mechanism that works as well as independent oversight.


Gov. Alejandro García Padilla talks to U.S. Treasury Secretary Jacob Lew during his recent visit to the island.

He warned about reaching a point where a federal bailout may come into play, saying Puerto Rico’s capacity to restructure would not be there forever and a financial rescue could be “the only choice available [in the near future].”

However, when asked by Caribbean Business whether a bailout would constitute the Obama administration’s Plan B, Lew countered that congressional leaders have repeatedly stated that not a single penny of U.S. taxpayer money can be used on the matter.

Bhatia and Perelló acknowledged that they have carried out discussions with Treasury about potential administrative efforts. For instance, the House speaker noted that they mulled having the federal government guaranteeing new commonwealth bonds.

Another option involved bringing Treasury funds to recapitalize the GDB. The cash-strapped government bank has been on life support, restricting its cash outflows to avoid its collapse as well as the repercussions this would have on the rest of the commonwealth government.

“At this time, this is not on the table, and Treasury has said time and again that it can’t do it. So all pressure continues to be on Congress,” Perelló said.

“There are two options: Either Congress acts, or we have to embark on a restructuring process through voluntary negotiations that would prove complicated,” García Padilla said two weeks ago, when addressing the island’s $367-million default on May 2.

Commonwealth advisers have repeatedly indicated that restructuring talks with creditor groups are continuing, as they fine-tune a revised debt-exchange offer to creditors that targets roughly $50 billion of the island’s $70-billion debt. García Padilla was briefed on this new version last week.

Meanwhile, the U.S. Supreme Court could be soon ruling on the island’s locally enacted bankruptcy law, which was invalidated after being challenged in federal court right after its enactment. If declared valid, the law would only cover debt issued by public corporations, which amounts to roughly $20 billion.

The U.S. top court’s decision could change the game in Congress, as the locally enacted bankruptcy law is “viewed as even less palatable to them than [Promesa],” Reuters reported on Thursday citing sources and experts.

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