Secretary of the Treasury Jack Lew warned Monday that Puerto Rico will enter a debt crisis by Friday unless the Senate can pass a debt relief bill that the House approved in June.
“Puerto Rico has $2 billion in debt payments coming due that day, including payments on constitutionally prioritized debt on which Puerto Rico has not previously defaulted,” Lew wrote to Senate Majority Leader Mitch McConnell, R-Ky. “In the event of default, and if creditor lawsuits are successful, a judge could immediately order Puerto Rico to pay creditors over essential services such as health, education, and public safety.”
“This could force Puerto Rico to lay off police officers, shut down public transit, or close a hospital,” Lew added. “Even a retroactive stay on litigation passed by Congress a few days later would not reverse such a court order.”
The territory currently has more than $70 billion in outstanding debt, and its scheduled $2 billion payment on Friday is being seen as a major deadline by which Congress should act.
The ongoing debt crisis was a result of mismanagement and overspending in Puerto Rico, facilitated by the U.S. government’s hands-off approach in the island’s finances. Puerto Rico cannot legally file for Chapter 9 municipal bankruptcy like states can.
In June, the House passed a bipartisan compromise bill that would create an oversight board to help restructure the debt, although it stops short of a bailout for Puerto Rico, as it contains no new federal spending.
Failure to pass the bill by Friday would push the crisis “to an even higher level,” Lew warned.
A default is all but certain, as Puerto Rico Governor Alejandro Garcia Padilla has openly said the island does not have enough money to make its next payment.
“It’s just a reality. We do not have the money,” Padilla said earlier this month. “That’s why we’ve been saying that we will default on July 1.”
While the potential long-term affects of a default are not clear, Lew has reiterated that the crisis will only worsen if the senate refuses to act.
