Puerto Rico Rescue Bill Nears Completion in House Committee

Shopping in San Juan. Puerto Rico has a debt payment of about $422 million due on May 1. Credit Victor J. Blue for The New York Times

Shopping in San Juan. Puerto Rico has a debt payment of about $422 million due on May 1. Credit Victor J. Blue for The New York Times

The New York Times – Legislative staff members in Washington were said to be close on Friday to completing a revised bill that would give Puerto Rico extraordinary powers to wipe out debt under close federal supervision.

Aides at the House Natural Resources Committee, working through the spring recess, were still grappling with sensitive constitutional issues raised by the rescue package, even after lawmakers in San Juan took matters into their own hands on Wednesday by suddenly authorizing a unilateral debt moratorium for the island.

The Puerto Rican lawmakers said they were forced to act because Congress was taking too long. Their island’s Government Development Bank has a debt payment of about $422 million due May 1, and only $562 million in available cash; the law they enacted would let the bank delay the payment lawfully — at least as far as Puerto Rico is concerned.

Puerto Rico owes even bigger debt payments, totaling about $2 billion, on July 1.

The House’s draft bill still contains certain provisions that creditor groups have been fighting, and Natural Resources Committee aides said further refinements were likely. The committee is scheduled to take testimony on the rescue package on Wednesday, and aides said they hoped to send a finished bill to the House on Thursday.

The package still calls for Puerto Rico’s financial affairs to come under the supervision of a federal oversight board and to shed debt in a bankruptcylike federal court proceding after meeting certain requirements. Now, however, the composition of the oversight board is less certain.

Officials in Puerto Rico objected strenuously last week to what they saw as the colonialist overtones of an oversight board whose voting members would all be selected by the president.

Drafters have scaled back some of the board’s more intrusive powers. They preserved the board’s authority to ensure that Puerto Rico’s government adheres to an agreed-upon fiscal plan. The board would also be kept in place until Puerto Rico regained its ability to sell debt in the municipal bond market. The number of board members, previously seven, may change, legislative aides said.

Another contentious provision is the so-called cramdown, which allows a court to force creditors to accept less money for their claims than they want.

Puerto Rico’s creditors say this provision will skew any debt restructuring in the island’s favor before they even start negotiations. But Puerto Rico and its supporters argue that without the ability to force financial settlements on unwilling creditors, Puerto Rico could end up in the same predicament as Argentina in recent years, hounded relentlessly by holdout creditors.

Puerto Rico’s advocates in the Obama administration, especially in the Treasury Department, also say forced creditor settlements are essential if the island is to shed debt quickly enough to escape a death spiral. Its economy is contracting, and discouraged residents have been moving to the United States mainland, reducing the island’s economic prospects and making it even harder to repay the debt. Only the power to renegotiate debt quickly can break the cycle, they say.

To prevent abuses, lawmakers are considering whether to require Puerto Rico to work out all settlements before entering the court-supervised phase of its restructuring. The oversight board would, in effect, hold the keys to the courthouse, and not let Puerto Rico petition the court until all creditors had approved their settlements by class.

Another contentious provision that is still being resolved is whether to halt creditor lawsuits while Puerto Rico is under federal oversight — the way a bankruptcy court can offer debtors shelter from lawsuits with its “automatic stay.”

Creditors have warned that if lawsuits against Puerto Rico are stayed, the island might have the ability to pick which creditors it wants to pay, exhausting resources that ought to be divided among all creditors equally.

As of Friday, the lawmakers were considering whether these concerns might be allayed by staying all lawsuits for a short period — perhaps just six months, for example.

Conservatives in the House, the aides say, have taken creditors’ concerns to heart, and are worried that if Puerto Rico gets extraordinary powers to abrogate debt, distressed states like Illinois will soon come to Washington seeking the same thing.

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