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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