New legislation will allow Puerto Rico debt restructure

Washington (AFP) – Debt-hobbled Puerto Rico will be able to restructure its debt in a bankruptcy-style arrangement under new legislation agreed by the US Congress and the White House Thursday.

The “Promesa” legislation will place the US territory under a powerful oversight board that will be charged with overseeing fiscal and structural reforms aimed at stabilizing its finances.

The board will also be empowered to negotiate a restructuring of the Caribbean island’s $70 billion in debt, after it defaulted on hundreds of millions of dollars in bond payments.

Locked in recession for more than a decade and increasingly unable to service its debt, Puerto Rico was blocked by US law from entering formal bankruptcy protection, which could have allowed a court to force creditors to write off large amounts of its debt.

Puerto Rico’s government and the White House had lobbied for Congress to create a court-overseen bankruptcy process to sort out its debts as creditors have not agreed on a voluntary restructuring.

But Congress has been reticent to accept any legislation that would offer a bailout to the island, or to permit a writeoff of Puerto Rico’s debt without any reforms made in parallel.

The “Promesa” legislation allows for a similar process under an oversight board chosen by the president from names proposed by congress. The board will be empowered to manage debt restructuring talks with creditors but also to direct the Puerto Rican government to implement reforms.

“Years of disastrous policies have completely wrecked Puerto Rico’s economy. As a result, the island and its millions of American citizens face a humanitarian crisis. That’s why we must allow for a responsible restructuring for Puerto Rico’s debt,” said Representative Sean Duffy, one of the sponsors of the bill.

Puerto Ricans are US citizens, but have not lawmakers in the US Congress.

In a statement of support, Treasury Secretary Jacob Lew, who has led the Obama administration’s efforts on the Puerto Rico crisis, said the bill includes restructuring tools “that are comprehensive and workable.”

It allows the territory “to restructure all of its liabilities, provide no bailouts for any creditors, and enable an orderly resolution to Puerto Rico’s worsening crisis,” Lew said.

“Congress must stand firm and resist calls from financial interests to undermine this effort every step of the way,” he added.

That was an allusion to the heavy pressure that some creditors, notably hedge funds, have asserted in Congress to block a  bankruptcy-like mechanism that could force a writedown in the value of their bond holdings.