Republicans Show Signs of Compromise on Puerto Rico

THE WALL STREET JOURNAL –  Por NICK TIMIRAOS and KRISTINA PETERSON

Puerto Rico and U.S. flags fly in the Old Town district of San Juan. Puerto Rico defaulted in January on $37 million in interest on bonds it said it couldn’t pay. PHOTO: PAUL J. RICHARDS/AGENCE FRANCE-PRESSE/GETTY IMAGES

Puerto Rico and U.S. flags fly in the Old Town district of San Juan. Puerto Rico defaulted in January on $37 million in interest on bonds it said it couldn’t pay. PHOTO: PAUL J. RICHARDS/AGENCE FRANCE-PRESSE/GETTY IMAGES

Goals of any legislation are to give Puerto Rico a one-stop shop for negotiating with creditors that will be more orderly
Bipartisan discussions over how to resolve Puerto Rico’s debt crisis suggest at least a slim legislative pathway has opened for the Obama administration, which is seeking congressional action before potential defaults accelerate this summer.

GOP staffers have discussed in recent weeks with Treasury Department officials how to pair a debt-restructuring authority, the top priority of Democrats, with a strong oversight board, the main goal of Republicans.

Numerous political land mines still loom, and the discussions haven’t produced a bill yet. One key question is whether both sides can agree on an oversight structure powerful enough to assure Republicans that Puerto Rico will follow through on overdue financial overhauls, but also structured to respect the island’s self-governance, a concern of Democrats.

The talks must also find a way to empower Puerto Rico—or the oversight board—to restructure some of the island’s $72 billion debt load. Municipalities in U.S. states can seek relief through chapter 9 of the bankruptcy code, but the code doesn’t apply to territories.

The goals of any legislation are to give Puerto Rico a one-stop shop for negotiating with creditors that will be more orderly than piecemeal litigation that creditors have already filed while ending the island’s unsustainable habit of running chronic deficits. Puerto Rico defaulted in January on $37 million in interest on bonds it said it couldn’t pay.

While some conservatives will balk at proposals granting the territory any debt-relief authority, the discussions highlight a growing acknowledgment among GOP lawmakers that Congress may need to take a more active role.

Puerto Rico’s fiscal mess is “something that we ought to try to figure out some way forward on,” said Senate Majority Leader Mitch McConnell (R., Ky.) last week. Mr. McConnell said Senate Republicans were discussing options that wouldn’t “involve the use of federal tax dollars.”

President Barack Obama told congressional Democrats that a legislative solution for the island’s debt crisis is a top priority this year. “The most urgent tool that we need right now—a comprehensive restructuring authority—costs taxpayers nothing,” Mr. Obama said at the lawmakers’ annual retreat in Baltimore last week.

Puerto Rico is among the likely agenda items at Tuesday’s White House meeting between Mr. Obama, Mr. McConnell and House Speaker Paul Ryan.

Puerto Rico has been in recession for a decade, and in that time its debt load has grown nearly 64% while its population has fallen 9%. Further tax increases and public-sector cutbacks could drive more residents, who are U.S. citizens, to the mainland.

Many Democrats—and at least two Republicans so far—have endorsed separate bills that would amend the bankruptcy code to give Puerto Rico access to chapter 9. But meddling with chapter 9 has met heavy opposition from other Republicans, including several conservatives on the House Judiciary Committee, which has jurisdiction over the bankruptcy code.

The latest discussions would potentially avert that contentious debate by looking at how to create a separate restructuring mechanism exclusive to U.S. territories, using constitutional authority granted to Congress to manage federal territories. The talks are playing out in the House Committee on Natural Resources, which has jurisdiction over territories and is taking the lead shepherding the bill in the House.

The crisis is reaching a tipping point because Puerto Rico is unable to borrow in the capital markets. To pay bondholders, the government has been delaying tax refunds and payments to vendors while borrowing from pensions.

Puerto Rico’s financial advisers project the territory will run deficits of $28 billion over the next five years. They say economic reforms will close less than half of that gap, requiring debt forbearance and restructuring for the balance.

The island’s creditors are furious that Puerto Rico’s government is demanding haircuts without providing a detailed accounting of its finances, which include a series of complex inter-government transfers.

Puerto Rico’s government faces chronic budgeting woes. It hasn’t balanced its budget since 2000. Generous federal tax benefits encouraged bond investors to finance those deficits.

While bankruptcy is often viewed as an alternative to bailouts, critics have characterized retroactive legal changes that allow for write-downs as a “bailout,” even though they wouldn’t cost the U.S. government any money.

The prospect of legislation, which until the end of last year had appeared remote, could further complicate long-stalled negotiations over a voluntary debt exchange deal between Puerto Rico’s government and its creditors, which commenced on Friday in New York.

A bill isn’t likely to pass the Senate without a debt-relief mechanism because Republicans, who control 54 seats, need at least 60 votes to overcome procedural hurdles. All 46 senators in the Democratic caucus signed a letter last week that said they wouldn’t support a bill without restructuring. “All this other stuff is simply not going to do the deal,” said Senate Minority Leader Harry Reid (D., Nev.).

House lawmakers are looking to finalize legislation that could pass the natural resources committee ahead of a March 31 deadline issued by Mr. Ryan.

Other elements under consideration include requiring an independent mediator to seek a consensual agreement between creditors and Puerto Rico’s government-related entities before any type of restructuring proceeding could begin. Another option would be to design a mechanism to compel holdout creditors to accept consensual agreements struck between majorities of creditor

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