US bill provides oversight and restructuring on Puerto Rico debt

Puerto Rico owes a whopping $70 billion dollars. On Friday, July 1, about $2 billion in principal and interest payments are due to be paid.

Even though the U.S. Senate is in the process of approving a bill to restructure the debt, Puerto Rico Governor Alejandro Padilla made it clear that he would still not pay bondholders, saying: “On July 1, 2016, Puerto Rico will default on more than $1 billion in general obligation bonds, the island’s senior credits protected by a constitutional lien on revenues.” This will be the first time the US territory has ever missed a payment on its $13 billion general obligation, debt that according to the Puerto Rican constitution has top claim on government funds. Padilla claimed he would not have enough to make the payment even if he shut down the government.

A bill in the U.S. Senate will give the island the ability to cut its debt and put a hold on any bondholder lawsuits which could make the territory unable to pay schools, police, and heath care. The Senate voted today, June 29 to pass the measure, 68 to 32. The margin represents a super-majority of votes. The bill is almost identical to one that passed the House of Representatives earlier. A final vote could come as early as tonight allowing Obama to sign it before July 1st. Obama has indicated he would sign the bill. The default on Friday will be the first from a state-level borrower since Arkansas back in 1933. However, Puerto Rico has already defaulted on debt issued by the Government Development Bank and two other agencies. It also owes contractors and suppliers another $ 2 billion.

Nearly half of the territory's 3.5 million residents live in poverty. Unlike a city such as Detroit, Puerto Rico cannot file for bankruptcy protection to prevent an onslaught of lawsuits if it defaults. The new bill will provide a federal control board that will have the power to oversee the territory's budget and a debt restructuring in court if this is needed. The Obama administration has supported the legislation and lobbied for it. Investors will still seek to ensure that the government cuts spending and becomes more efficient. The bill in effect takes away fiscal independence from Puerto Rico. Securities analystDaniel Hanson said: “Creditors are now going to get a court or the control board to come together and force the Puerto Rican government into some kind of austerity plan,”

Many Puerto Ricans worry that the oversight board would place investor concerns above those of islanders. There is even a provision that might lower the minimum wage for some young workers and also weaken overtime pay rules. However, some Republicans complain that the bill is in effect a bailout for the island. Those who voted no on the procedural vote were made up of 18 Republicans, 13 Democrats, and Independent Bernie Sanders.

Senate Majority Leader Mitch McConnell a Republican claimed that the bill avoided a tax-payer funded bailout of the territory and a humanitarian disaster for the Puerto Rican people. Democratic leader, Harry Reid backed the bill while claiming to share the concerns of some Democratic opponents saying: "I take issue with the oversight board, their excessive powers and appointment structure, but he supported the bill anyway: "Otherwise we..turn them over to the hedge funds and they will sue them to death." The bill is called the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA).

Two key supporters of the bill lobbied to convince skeptics to support it. Treasury Secretary Jack Lew said that if it had been written by one person alone it would have been different but that the bill was a compromise that would prevent Puerto Rico from descending into chaos and creating a terrible ordeal for the 3.5 million islanders. Puerto Rican Governor Garcia Padilla also said that while the bill was "imperfect" it provided for orderly debt restructuring and the possibility of negotiations with creditors.

Puerto Rico has been suffering not only with a huge debt but the economy is stagnant as the population moves to the mainland eroding the tax base for providing essential services. Almost a third of government revenues are now spent simply on servicing the debt.