As we reported last month, Speaker of the House Paul Ryan had put together a framework for a bill in which Republicans and Democrats in the House could agree on that would help Puerto Rico restructure its debt.
Thursday, the bill overwhelmingly passed in the House with bipartisan support the WSJ reports: 297 to 127, with support of 139 Republicans and 158 Democrats. The bill was opposed by 103 Republicans and 24 Democrats. The legislation will now go to the Senate where it's expected to pass, although Ryan is continuing to put the pressure on congress to get the deal finalized: "This bill prevents a bailout. That's the entire point. If we do not pass this bill, there will be no other choice."
Puerto Rico has already begun defaulting on $70 billion in debt, most recently last month when it missed most of a $422 million payment, and faces $2 billion in payments on July 1 that Puerto Rico has said can't be paid."Come July 1, if nothing is done, Puerto Rico will technically be bankrupt. Assets will be tied up in courts. It is very likely that essential services will have to be suspended." said Anne Krueger, a former IMF economist.
The legislation allows for a federal oversight board whose members will be appointed by congress and president Obama. The oversight board will determine whether and when to initiate court-supervised debt restructuring, and the board terminates after Puerto Rico regains the ability to borrow at reasonable interest rates and balances it's budget for four consecutive years. In other words, the oversight board will never go away.
Bond holders (hedge funds, mutual fund firms, financial institutions and Puerto Rican residents) know that it is now highly likely they will be receiving a haircut even though the payments are guaranteed by the Puerto Rican constitution. Bond holders have warned that the legislation will hurt the island's ability to issue new debt in the future, and are still struggling with the fact that there are pension liabilities that should be restructured as well, not just creditor claims.
Officials however, hope the bill accomplishes two things according to the WSJ.
Officials hope the bill accomplishes two things. First, they want to avoid a messy courtroom brawl between different creditors and the government that could curtail public services and further chill investment in Puerto Rico, which has been in recession for most of the last decade. Second, they want to reduce a debt burden that currently absorbs around 30% of the commonwealth’s revenue, far more than any U.S. state.
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Puerto Rico securities are staging the longest rally in a year with the U.S. House of Representatives’ passage of the measure to address the cash-strapped island’s debt crisis.
Commonwealth securities gained for nine straight days through Thursday, the longest advance since June 2015, according to S&P Dow Jones Indices. The value of Puerto Rico debt increased 0.56 percent Thursday, the biggest one-day gain in two months.
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The mad dash to put a framework in place that allows Puerto Rico to be able to discharge debts through a bankruptcy process implicitly sends the message that now it's ok to take on unsustainable amounts of debt in the future, as it can be shed through bankruptcy. It is also entirely unclear as to what measures, if any, the legislation has that will enforce the US territory to get its fiscal house in order. If creditors do penalize Puerto Rico for this, and they will, the US taxpayer bailout that Paul Ryan and company adamently claim is being avoided will soon become inevitable.
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