The Obama administration urged Congress to move quickly to address Puerto Rico's debt crisis after commonwealth officials warned they might run out of money before the end of the year.
“Given the commonwealth’s projection that it will exhaust its liquidity later this year, Congress must act now to provide Puerto Rico with access to a restructuring regime," the Treasury Department said in a press release after Treasury Secretary Jacob Lew met with the territory's Gov. Alejandro García Padilla on Thursday. "Without federal legislation, a resolution across Puerto Rico's financial liabilities would likely be difficult, protracted, and costly."
The letter suggested to some observers that the administration wants to go beyond the bankruptcy legislation proposed so far, and that Puerto Rico itself - and not just its public corporations and municipalities -- should be given access to a restructuring process.
Earlier this year bills were filed first in the U.S. House of Representatives and then the U.S. Senate to allow Puerto Rico's cities and public corporations to use Chapter 9 bankruptcy for their debts. The bills have yet to advance. Less than half of Puerto Rico's $71 billion of debt is owed by public corporations and municipalities.
On July 28 United State Secretary of the Treasury Jacob Lew wrote a public letter to U.S. Sen. Orrin Hatch saying that, "a central element of any federal response should include a tested legal bankruptcy regime that enables Puerto Rico to manage its financial challenges in an orderly way." This may have been a reference to Chapter 9 bankruptcy, the only "tested bankruptcy regime" for U.S. government entities.
In a story by InterNewsService published Thursday on the El Vocero news web site, Puerto Rico Secretary of the Treasury Juan Zaragoza said it was possible that Puerto Rico's government would run out of operating money in November.
Lew, García Padilla and National Economic Council Director Jeffrey Zients met in Washington Thursday.
"Secretary Lew, Director Zients and Governor García Padilla discussed the important role the federal government has to play in assisting Puerto Rico," according to the Treasury statement. The statement noted the Commonwealth's projection that it will exhaust its liquidity later this year.
Up to now the administration has indicated its support for Puerto Rico being given access to Chapter 9 bankruptcy. If it were to be given Chapter 9, its municipalities and public corporations could restructure their debts in a bankruptcy process.
The passage's focus on restructuring as a way of dealing with the central government's liquidity crisis, as opposed to a financial crisis at, for example, the Puerto Rico Highways and Transportation Authority, may suggest the Obama administration's support for a wider Puerto Rico restructuring. The press release's following sentence calling for "federal legislation" to allow "a resolution across Puerto Rico's financial liabilities" also supports this interpretation.
"It would seem that the U.S. government is slowly moving on this," said Cumberland Advisors director of fixed income John Mousseau. "But slow movement is better than none. So far it's been a total abdication of responsibility given that Puerto Rico is a U.S. commonwealth. I think maybe we are looking at some pushing of a bankruptcy option but hopefully it is accompanied by some Federal help as well. Congress started the fire 10 years ago by removing long-in-place tax breaks for corporations. And they've stood by while everything eroded. Time to get back in the game."
Brookings Institute Senior Fellow Barry Bosworth said he found the statement, "a bit more ambiguous" on whether the administration's view has changed.
However, Bosworth also said, "I agree that a bankruptcy process needs to be broader than just the public corporations and municipalities. The largest portion of the debt is in the general fund and an attempted resolution of that debt without court protection is likely to result in chaos."
Evercore director of municipal research Howard Cure said a broader approach may be appropriate. "Considering the dire financial situation of the commonwealth and the amount of direct Puerto Rico debt outstanding from general obligation and COFINA [Puerto Rico Sales Tax Finance Corp.], I think there is a need for Chapter 9 bankruptcy to cover more than just public corporations," he said. "My expectation is that if the federal legislature was to explore the possibility of Chapter 9 for Puerto Rico, all sectors and debt instruments would at least be considered."
