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.

Puerto Rico rings in New Year by defaulting on debt

Puerto Rico Governor Alejandro Padilla said the island will not make a $35.9 million payment to its Infrastructure Finance Authority nor another $1.4 million payment to its Public Finance Corp.

This is just a small fraction of the $1 billion in debt that is due on Monday. The government already defaulted on payments to its Public Finance Corporation back in August. Paying off general obligation debt is a priority and on January 4th the government will be required to make a payment of $328.7 million. In total, Puerto Rico has $70 billion in total debt it claims it cannot pay. The government would like to declare bankruptcy. It cannot do this without the support of U.S. Congress. Hedge funds and other creditors are lobbying hard to see that this does not happen.

The government, as in Greece, has been forced to implement many austerity measures to finance its upcoming payments. It has already taken $163 million from other agencies including the highway, convention center and busing authorities. There are also rumours that the government will borrow money from the public employee pension funds. The government is also saving money by delaying the release of income tax refunds.

Government austerity measures to meet payments, include the laying off of 30,000 public sector workers. The sales tax was a hefty 7 percent but now has been upped to 11.5 percent. One third of revenues are now used solely to pay down debt. Since 2006 the economy has actually shrunk by 10 percent and the poverty rate is now a staggering 45 percent. Since Puerto Ricans are US citizens many are simply moving away to the continental U.S. as indicated on the appended video.

Unlike a U.S. city, such as Detroit, Puerto Rico cannot just declare bankruptcy and restructure its debt. As a commonwealth it must get approval of the U.S. Congress to restructure its debt. Antonio Weiss of the Treasury Department said that resolving the Puerto Rican debt crisis would require Congressional action.

There are hedge funds that have a huge stake in Puerto Rico's debt situation. Hedge funds bought up their debt:In the last year, as Puerto Rico’s spiraling debt effectively prevented it from borrowing on ordinary credit markets, creditors began selling off Puerto Rican debt, as David Dayen reported in the American Prospect. A select group of big investors, most of them hedge funds, stepped in to buy the debt for a mere fraction of its original value.

These hedge funds are known as “vultures” because of their attempts to squeeze a profit from a penniless debtor’s proverbial carcass. Vultures buy the debt of cash-strapped sovereign nations -- think Greece and Argentina -- at discounted rates from other investors, who have grown scared they will not be paid back.

The hedge funds want to have the Puerto Rican debt paid off at full value even though they bought it at a huge discount. The last thing they want is Puerto Rico to be able to declare bankruptcy. Holders of Puerto Rican bonds paid as little as 30 cents on the dollar for them and the bonds have yields of up to 11 percent. These bonds are tax exempt in all 50 U.S. states. General obligation bonds take top priority when it comes to paying off debt. There are conflicts even within the groups holding debts. Some who holds bonds support those holding debt in public corporations being subject to debt restructuring. This would help the government pay them!

The hedge funds demand large returns because their investments are risky. In 2014 they bought general obligations bonds that no one else would touch. They need to protect this risky investment by political lobbying. Sen.Blumenthal (D-Conn) working with Marco Rubio (R-Fla) tried to have a provision that gave Puerto Rico at least some bankruptcy powers:But a group of hedge funds that includes D.E. Shaw -- a firm headed by top Hillary Clinton donor David Shaw -- played a key role in defeating the bipartisan effort with a multi-front lobbying offensive, as The New York Times reported at length. Blue Mountain, another hedge fund in the group, launched a sophisticated astroturf campaign casting the bill, which would cost taxpayers nothing, as a “bailout” that would harm ordinary seniors whose retirement plans rely on returns from Puerto Rican bonds.Rubio withdrew his support under pressure. Joseph Stiglitz, Nobel Prize-winning economist says of the hedge funds and financiers:“What they are doing, by getting all the resources for themselves, is undermining the viability of Puerto Rico as a commonwealth. They want their money now, and they want to get the rules set so that they can make money for the next 20 years.”

Read more: http://www.digitaljournal.com/business/business/op-ed-puerto-rico-to-begin-2016-by-defaulting-on-debt/article/453732#ixzz3wPbQLXJ9