Not waiting to see what kind of legislation comes from the U.S. Congress, the House of Representative in the Commonwealth of Puerto Rico, in financial crisis, has passed a bill to allow the government there to stop paying its debts. The bill, just signed by Puerto Rico’s Governor Alejandro Garcia Padilla, passed by a 26-21 vote in the House after it had already passed in the Commonwealth’s Senate. This legislative action comes as the U.S. Congress is considering legislation to address the financial crisis in Puerto Rico.
While the debate continues in our Congress over whether to urge reforms or give bailouts and bankruptcy to Puerto Rico to address their current financial crisis, the government is taking the matter in their own hands by enacting this legislation, as signed by Gov. Padilla, to give the governor authority to declare a moratorium that would allow the government of Puerto Rico, including possibly any of its agencies, departments, or state-run enterprises, to simply quit paying their debts. Padilla is expected to sign the bill before the Commonwealth’s Government Development Bank (GDB) has a May 1 deadline on a $422 million debt payment.
The government of Puerto Rico faces $70 billion in debt while defaulting recently on $37 million in bond payments. The debt is now more than $15,000 per capita, and that is 10 times higher than that of any of the 50 U.S. States. This past summer, the government of Puerto Rico declared its debt unpayable. The government of the Commonwealth has asked Congress to grant it bankruptcy relief from its debt, and in not waiting for Congressional actions, Puerto Rico has decided it will unilaterally stop paying it debts.
The legislation might cause problems with the existing restructuring plans of some Puerto Rico’s instrumentalities, such as that with it’s electric utility PREPA. Reuters cited Stephen Spencer, financial advisor to bondholders including OppenheimerFunds and Franklin Advisors, as noting that restructuring issue, along with saying the deal has creditors agreeing to a 15 percent reduction in payouts, which “should be explicitly preserved, rather than being cast into a state of uncertainty…(that could) close the door to anyone extending new credit to Puerto Rico, seriously impeding its ability to meet citizens’ needs.”
The Financial Times quoted Daniel Hanson, an analyst with Height Securities in Washington, as saying the legislation “inaugurated a new era of litigation, where creditors will challenge the government’s lawless approach to managing cash flow and debt payments over recent years”.
In legislating that the discontinuing of paying the debts of Puerto Rico to creditors, the action could be determined to be an unconstitutional takings in violation of the financial rights of those creditors. This may be the legal basis for challenge to the debt moratorium bill just passed by the legislative bodies of Puerto Rico.
While Congress will hold hearings next week on how to address the financial crisis in Puerto Rico, it is clear their government is not waiting and essentially seeks to force bankruptcy by not paying their bills until Congress gives bailout and bankruptcy. In Congress, the debate continues as some continue to demand bankruptcy while the House Committee on Natural Resources is working to write legislation to address the crisis. Puerto Rico’s Governor Padilla, who advocates bankruptcy to address the Commonwealth’s financial crisis, is reported by The New York Times as having called the House Committee draft, “shameful and degrading.”
The financial crisis in Puerto Rico is of benefit to some politicians in San Juan and Washington D.C. who are interested in pursuing the direction of bankruptcy and bailout rather than reforms that will bring about prosperity for the people of the Commonwealth. Decades of irresponisible policies and poor management of the economy of Puerto Rico has lead to the current crisis.
Enacting legislation to allow themselves to stop paying their debts, after demanding that Congress give them bankruptcy rather than reforming their financial system and economy shows how committed the government of Puerto Rico is to this path of addressing the crisis with the very “solution” that will only enable and condone the bad decisions that have lander the Commonwealth in this crisis. It can only be hoped that wisdom will prevail in Congress and legislation to steer Puerto Rico in the direction of reform and prosperity, rather than bankruptcy, will emerge from the House Committee next week.