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Congress balks at Puerto Rico debt relief—for now

A worker operates a Caterpillar Inc. backhoe during road construction in Old San Juan, Puerto Rico.
Susana Gonzalez | Bloomberg | Getty Images
A worker operates a Caterpillar Inc. backhoe during road construction in Old San Juan, Puerto Rico.

Puerto Rico has a lot of work ahead before it can count on help from Washington, congressional leaders say.

Senate Finance Committee Chairman Orrin Hatch, Republican from Utah, has told Puerto Rican officials that he doesn't know what Congress can do to help Puerto Rico with its enormous fiscal and economic challenges without more information and better financial documentation.

Hatch also voiced skepticism over the commonwealth's request to restructure its massive debt load under Chapter 9 bankruptcy laws.

Melba Acosta, the president of the Government Development Bank, as well as Puerto Rico's sole congressional representative, Pedro Pierluisi, both appeared before U.S. lawmakers on Tuesday to make the case for why the island will likely need federal support.

That aid would include access to Chapter 9 bankruptcy protection laws that are currently unavailable to the U.S. territory, to help it with an orderly restructuring of its $72 billion in outstanding debt owed.

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Allowing Puerto Rico to restructure the debt of its municipalities under U.S. bankruptcy laws is a proposal that was verbally supported by two Democratic senators, Bob Menendez of New Jersey and Chuck Schumer of New York. Menendez said it would be "virtually impossible" to implement any of the proposals being discussed without granting Puerto Rico the ability to reorganize its debt.

Schumer went a step further, announcing that he planned to send a letter on Tuesday to Sen. Chuck Grassley, chairman of the Judiciary Committee, urging him, at the very least, to hold hearings on legislation for a bill to give Puerto Rico the Chapter 9 option.

However, Douglas Holtz-Eakin, one of the four witnesses who provided testimony at the hearing, believes that allowing the commonwealth's publicly owned corporations to file for bankruptcy is not the answer, and ultimately would not help the Puerto Ricans that hold roughly 30 percent of the total outstanding bonds.

"The most widely discussed change, Chapter 9 bankruptcy protection for Puerto Rican governmental entities, would not improve economic growth, would not change the budget trajectory, and is not something that should be pursued at this time," Holtz-Eakin said.

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Holtz-Eakin also criticized the debt restructuring plan from the Governors Working Group, which recently announced it would seek a single, comprehensive exchange transaction for a $47 billion chunk of the island's outstanding debt.

"It doesn't change the growth trajectory, so it doesn't work," Holtz-Eakin said. He added that there needs to be "a fundamental focus on better long-term economic growth," and that "without that, nothing gets solved."

Despite much of the hearing being spent discussing Puerto Rico's need for access to Chapter 9, certain policies fall outside the Finance Committee's areas of jurisdiction, including federal laws governing the U.S. bankruptcy code, Hatch noted in his opening statement.

Daniel Hanson, an analyst at Height Securities who attended the hearing, believes that the key takeaway is that the Senate Finance Committee was willing to even have a conversation on what to do next. He believes that signifies that Puerto Rico's crisis, which likely will only get worse in the coming months as large debt service payments come due, has moved up Congress' priority list.

However, Hanson noted that in order to move forward with any sort of legislative changes or federal government intervention to help aid Puerto Rico, the commonwealth will have to provide, at the very least, solid financial data for the committee's review.