Puerto Rico’s creditors would take a hit under a new proposal to address the island’s major debt crisis that was announced Tuesday by House Natural Resources Committee Chairman Rob Bishop.
“The focus is on making creditors take a haircut,” Yale Law School’s Logan Beirne said Wednesday during a National Taxpayers Union conference call.
The proposed restructuring of Puerto Rico’s debt would avoid spending taxpayer money on a bailout, but it would require Congress to make a retroactive change to the terms of the agreements that the Puerto Rican government made with lenders. That outcome might seem like a simple fix, but it’s controversial in Congress.
Puerto Rico has accumulated more than $70 billion in government debt to bondholders and has a $46 billion pension liability. The island’s Constitution promises that bondholders take priority; with a fiscal crisis at hand, the territory’s government wants Congress to allow it to declare bankruptcy.
“The size of this debt prevents us from getting out of the cycle of recession and contraction,” Puerto Rico Gov. Alejandro García Padilla said last year.
Bishop’s proposal would create an oversight board to audit the territorial government and potentially “provide for court-supervised debt restructuring where necessary” if Puerto Rico and its creditors can’t strike a deal on their own. “This discussion draft will change,” the Utah Republican said Tuesday. “We are releasing it now to encourage feedback, so people can respond to the draft proposal, not a supposition of its contents.”
Congressional conservatives are skeptical of the restructuring contemplated in Bishop’s proposal, even if it’s not a formal bankruptcy. “The discussion draft legislation regarding Puerto Rico’s fiscal situation includes provisions that essentially provide for a federally forced restructuring of the island’s debt,” Republican Study Committee chairman Bill Flores, R-Texas, said Wednesday. “While the draft proposal does include some positive, pro-growth policies to restore Puerto Rico’s stagnant economy, such as reducing burdensome federal regulations, the draft bill still needs work to prevent a bankruptcy-style involuntary restructuring.”
Legislative attempts to assist Puerto Rico are complicated by the possibility that they could set a precedent for how Congress handles a debt crisis within the 50 states. “There are implications that we should consider carefully because we don’t want to end up disregarding property rights as sort of a faux fix,” Beirne said on the call. “We don’t want to be setting ourselves up [for the] next time we deal with Puerto Rico’s or some other entity’s death spiral.”
