Treasury's Lew urges action on Puerto Rico

Federal Reserve Chair Janet Yellen and Treasury Secretary Jacob Lew at the G-20 Finance Minister and Central Bank Governors group photo, during the World Bank/IMF Spring Meetings at IMF headquarters in Washington, Friday, April 15, 2016.
Federal Reserve Chair Janet Yellen and Treasury Secretary Jacob Lew at the G-20 Finance Minister and Central Bank Governors group photo, during the World Bank/IMF Spring Meetings at IMF headquarters in Washington, Friday, April 15, 2016.

WASHINGTON -- Treasury Secretary Jacob Lew said he is confident a deal can be reached to solve Puerto Rico's debt woes, urging Congress to take action as schools and hospitals on the island scale back services.

"Puerto Rico doesn't have decades. Puerto Rico has a crisis today," Lew said Tuesday in an interview. With 3.5 million Americans living on the island, "the need for action is urgent."

Puerto Rico missed a deadline Sunday for a $422 million bond payment for its Government Development Bank. That has escalated the pressure on Congress to act on legislation to help reduce the island's financial crisis. Lew warned Monday that Puerto Rico faces a series of "cascading defaults" and may need a U.S. government bailout if Congress doesn't act.

"What would potentially do great harm to the muni market is an uncontrolled chaotic unwinding of debt," he said in the interview in Los Angeles.

Puerto Rico racked up $70 billion of debt across more than a dozen issuers as it borrowed to paper over budget deficits. Its next deadline is July 1, when a $2 billion bond payment is due. That includes $805 million for its general-obligation bonds, which are seen as the island's most sacrosanct debt.

Congress returns from recess Tuesday, and members plan to release a new version of a Puerto Rico bill that would establish a federal control board to oversee any debt restructuring and weigh in on spending plans. It's unclear whether the legislation would become law by July.

"The oversight board has to be one that is fair, that has to balance interests," Lew said. "There are solutions to this that can be found if there is a desire on a bipartisan basis to do this in a way that is effective."

Lew's letter on Monday to House Speaker Paul Ryan, R-Wis., warned that without a legal framework for a debt restructuring, Puerto Rico is in danger of getting caught in "a series of cascading defaults" that could lead to a bailout.

"This is not just a matter of financial liabilities and litigation," Lew said in the letter, which was circulated to other lawmakers and released publicly. Late last year, Ryan instructed the relevant House committees to find a "reasonable solution" for Puerto Rico.

Lew cited signs of mounting woes, including the closing of hospital facilities on the island and the struggle to contain the spread of the Zika virus with scant financial resources available.

On Sunday, Gov. Alejandro Garcia Padilla gave a televised address in which he announced the payment default -- the biggest to date in Puerto Rico's worsening debt crisis -- and said he had to order it because Washington had failed to help in time.

"We have repeatedly traveled to Washington to convey the urgency of the situation," the governor said. "So far, no action has been taken. The crisis escalates each passing day."

Puerto Rico did pay $23 million, representing interest due, on Monday. The remaining $399 million that was not paid was to cover the principal.

Congressional aides said Monday that they agreed that the latest default showed an urgent need to establish federal oversight and restructuring powers for Puerto Rico, but they could not see a way to speed up the process. In 1984, Congress explicitly barred Puerto Rico from restructuring debt in bankruptcy, without leaving any rationale for doing so.

Now that they must design some other restructuring framework for Puerto Rico, lawmakers are intent on leaving a full paper trail, which takes time, said Parish Braden, a spokesman for the Republican majority of the House Natural Resources Committee, which is drafting the bill in consultation with House Democrats and President Barack Obama's administration.

The payment on Monday came from the island's Government Development Bank. That institution has been involved in virtually all public borrowing by Puerto Rico and performs other critical tasks as well, such as holding cash on deposit for municipalities and government agencies.

In November, the bank was found to be insolvent. Garcia Padilla placed the development bank in an emergency period last month to preserve its dwindling cash by limiting withdrawals only for programs that provide health, safety and education. The bank had $562 million of liquidity, according to a debt-moratorium law the governor signed last month.

Legislators on the island thought a bank run might ensue, and they raced to enact a measure giving the governor the power to halt debt payments by the development bank. Other, smaller debt payments were also due from other branches of government Monday, but the moratorium law was initially written to halt only debt payments by the Government Development Bank.

While waiting for Congress, some creditors have also been dickering with Puerto Rico over voluntary debt adjustments. One group, made up of credit unions that hold some of the development bank's debt, agreed to a one-year deferral of $33 million of the total $422 million payment.

Information for this article was contributed by Mary Williams Walsh of The New York Times and by Saleha Mohsin and Michelle Kaske of Bloomberg News.

A Section on 05/04/2016

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