Puerto Rico's default

Time running out as Puerto Rico's default picks up steam

By Rachael Bade and Colin Wilhelm

When Puerto Rico took its first major step toward a catastrophic default on Monday, lawmakers on Capitol Hill — where Puerto Rican officials looked for help — were nowhere to be found, having gone home for a one week recess last Friday.

The island began defaulting on most of a $422 million debt payment Sunday at midnight, but much bigger problems are just around the corner. Congress has just a handful of weeks to hammer out a legislative fix to save the island from financial ruin ahead of a second default on a $2 billion debt payment due in early July.

But while GOP congressional staff is working through the break to sketch out a Plan B — with an eye towards unveiling it around May 10 — getting a fix off the ground before July could be a major lift: House GOP leadership will have to convince enough conservatives to back a bill that’s been labeled a “bailout” by some. Democrats, too, will likely have to whip their own to back the deal — which could include provisions they don’t like, perhaps even a minimum wage cut for the territory.

And after all that, the Senate will still have to act quickly — no sure bet, given the chamber's history of taking its time to pass legislation.

Meanwhile, lawmakers only have few legislative days in May before they leave for their Memorial Day-recess in late May and early June.

The Treasury Department on Monday, just hours after the defaulted payment, pinned the blame squarely on the Hill, arguing that the recent “constructive, bipartisan discussions” between the Department and House Republicans have not led to bill that can work.

“Congress has yet to produce a workable legislative response. Meanwhile, the crisis in Puerto Rico has deepened,” Treasury Secretary Jack Lew wrote to Speaker Paul Ryan (R-Wis.). “Congress must work quickly to resolve the few outstanding issues on the proposed legislation to help Puerto Rico. … Further inaction only gives those seeking to deter Congress from passing a bill more time to continue making inaccurate and misleading claims about the legislation.”

Ryan spokeswoman AshLee Strong said bill author and Natural Resources Chairman Rob Bishop "is doing a tremendous job crafting a solution to address Puerto Rico's debt crisis in a timely and fiscally responsible way.”

“Discussions continue amongst all stakeholders,” she said in a statement for this story.

“I know the White House is pushing back, but they still haven’t signed off down there,” Bishop, the chairman of the House Natural Resources Committee, said late last week. “They keep saying they’re close to it, but they’ve been saying they’re close to it for two weeks. Let them actually do it and then we can move forward.”

As House Natural Resources Republican staff and the Treasury Department huddle to work through an impasse on the legislation this week, those opposed to the bill, including holders of Puerto Rican debt, have railed against the bill on airwaves in Congressional districts.

The stakes for Puerto Rico are immense, where a default could ruin the commonwealth's economy, and make it even harder for local officials to deal with the costs of more than $40 billion in unfunded pensions. The bill will also be a test for Ryan, with conservatives still wary of any rescue that could be perceived as a bailout and Democrats balking at an oversight board that would be set up by the bill and could overrule the island's local government. It's left Ryan with a narrow window for passing any bipartisan solution.

A group called the Center for Individual Freedom, which has targeted Republican House members who might support the bill have intensified their ad campaign against it, continuing to run ads against nominal bill sponsor Rep. Sean Duffy (R-Wis.), an ally of Ryan’s. According to The Tracking Firm, the group, which many believe to be backed by a small collection of hedge funds holding Puerto Rican bonds, spent $23,275 on radio ads labeling the bill a bailout this week in Duffy’s district. More broadly, the group has spent over $2 million on advertising against the Puerto Rico fix, and continues to expand the states in which its ads air.

While many Republicans say the bill is not a bailout, the optics remain difficult and even a hint of the politically radioactive term has slowed the measure's progress.

Pressure is also increasing on the left for the bill to shield pensions from having to take a bigger haircut than bond holders in any restructuring of the island's debt. In his letter, Lew called for Congress to, “balance important policy priorities more evenly, most significantly by offering a responsible process to ensure the retirement security of the 330,000 citizens in Puerto Rico who depend on their pension benefits,” Lew wrote.

All sides — except for a small group of hedge funds that have remained outside of talks between creditors and lawmakers — agree that Puerto Rico doesn’t have the funds to repay its debt, though many analysts thought the island’s Government Development Bank would meet most of its May 1 payment, at least before Gov. Alejandro Garcia Padilla signed a moratorium on debt payments.

Most analysts agree that unless Congress can produce an orderly restructuring plan, Puerto Rico will become enmeshed in years of lawsuits from bondholders, which would cripple the islands future ability to raise money and threaten economic disaster. And both sides of the aisle agree that doing nothing now means an actual bailout — where U.S. taxpayer funds help Puerto Rico out of its debt hole — will probably come sooner rather than later.

“Unless Congress passes legislation that includes appropriate restructuring and oversight tools, a taxpayer-funded bailout may become the only legislative course available to address an escalating crisis,” Lew wrote.