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Puerto Rico Blues
Treasury Secretary on Puerto Rico: It’s Chapter Nine Time

As Puerto Rico continues to slouch towards crisis—the commonwealth is reported to be $72 billion in debt, and questions are now being raised about whether one of its debt-issuing entities will default on August 1st—U.S. Treasury Secretary Jack Lew is loudly sounding the alarm. The Wall Street Journal reports on a letter from Lew to Senator Orrin Hatch, the Chairman of the Senate Finance Committee, in which Lew rules out a federal bailout but states that Puerto Rico urgently needs access to chapter 9 bankruptcy protection:

“Puerto Rico’s fiscal situation is urgent, and I believe it requires the immediate attention of Congress,” Mr. Lew said. Without an established legal option to restructure debts, the outcome would be “chaotic, protracted and costly both for Puerto Rico and more broadly for the United States,” he said […]

The Treasury Department said separately that Mr. Lew met Tuesday with Puerto Rico’s governor, Alejandro Garcia Padilla, to receive an update on its financial situation. Mr. Lew “said he would continue to work with Congress to build bipartisan support for a legal framework that helps Puerto Rico resolve its financial challenges,” a Treasury spokesman said.

It’s not clear that Lew will easily get his way. A bill extending bankruptcy protection to Puerto Rico is currently stuck in Congress. Two U.S. mutual funds—OppenheimerFunds Inc. and FranklinAdvisers Inc., the latter of which is also a big holder of Ukrainian bonds—between them hold as much as 15 percent of Puerto Rico’s outstanding debt. They are unlikely to roll over for a measure that could see them eat substantial losses. At the same time, if bailouts are ruled out, there appears to be little chance of squeezing more blood from this stone.

Puerto Rico has long been the poster-child of blue model governance gone awry—our very own Greece. Will the resolution of its crisis also involve a series of interlocking games of chicken, like in the Mediterranean, as both sides say the course while the situation goes from bad to worse? It appears we won’t have to wait long to find out.

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  • Fat_Man

    A chapter 9 proceeding for Puerto Rico will not cause a loss to bondholders. That is the result of the default. A bankruptcy proceeding is just the form where remedies are negotiated and equity is imposed among the creditors.

    • f1b0nacc1

      The GM bondholders are on line 1 and would like to talk with you….

      • Fat_Man

        they got ****ed over. It was politics. I knew the judge. He is a weasel. Nonetheless. the loss is incurred when the debtor runs out of cash, not when the Judge finishes the paperwork.

        • f1b0nacc1

          There is no question of that, but my comment was directed at your suggestion that bankruptcy proceedings were not lead to a loss to bondholders, certainly (given how political this is going to be) it will.

  • Andrew Allison

    US states can’t declare bankruptcy. Is it Lew’s argument that because PR isn’t a state it should be enabled to do something which would not be permitted if those proposing statehood had their way? That seems a bit of a stretch. Truth is that, as in the case of Greece, buyers loaded up on high-risk bonds in the anticipation that the currency zone (the USA in the case of PR) would bail them out if thing went bad. And just what business does Lew have meeting with the Governor of PR to discus private debt?

  • dawnsblood

    I have read enough to understand PR is in a slow death spiral. They have taken on way too much debt, have an economy out of kilter with the realities there and have grown government (especially teacher positions) too much for the slowly dwindling population there. Meade is correct that it is our own Greece at the moment because it is almost at the point where they will not be able to make all required payments and keep the lights on.

    They probably do need a bankruptcy style restructuring of their debt. They also need a top to bottom restructuring of their economy (gov benefits are close to the average wage there among other things) and a reordering of the government spending priorities. Since bankruptcy cannot fix all their problems, I am unsure how successful it will/would be in any case.

    I am glad to hear the Obama Administration seems to ruled out a federal bailout. It doesn’t seem to me that handing a territory a ‘Get out of jail free’ card would have solved the behavior that got them here in the first place.

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