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Jack Lew warns that time is running out for Puerto Rico

The Puerto Rican flag flies near the Capitol building. US Treasury Secretary Jack Lew warned on Monday that time was running out to address the spiraling crisis in Puerto Rico a week after the island suffered a dramatic default.
Joe Raedle | Getty Images
The Puerto Rican flag flies near the Capitol building. US Treasury Secretary Jack Lew warned on Monday that time was running out to address the spiraling crisis in Puerto Rico a week after the island suffered a dramatic default.

US Treasury Secretary Jack Lew warned on Monday that time was running out to address the spiraling crisis in Puerto Rico a week after the island suffered a dramatic default.

Mr Lew traveled to San Juan early on Monday morning as policymakers in the US capitol returned from a week-long recess, with less than two months to hammer out details of a rescue package before Puerto Rico faces a deadline on debts backed by its constitution.

"It's very hard to do things like this until you are at a moment of necessity or crisis," Mr Lew said outside one of the island's hospitals. "This is that moment."

Policymakers in the House of Representatives will unveil a new version of the emergency legislation on Wednesday, which will clarify how the bill will prioritize different creditors in Puerto Rico's labyrinthine web of bond issuers.

Treasury officials have offered technical advice to politicians crafting the legislation and Mr Lew said that "there has been progress" after day-long conversations on Friday.

"This is a good-faith effort to try and resolve the differences," he said. "There are pressures on Congress that every time they move in the right direction, pull it back a bit. This is not going to be a solution that anyone thinks is perfect."

The island, which does not have access to bankruptcy protections like US cities and towns, has limped along as it balances a $70 billion debt burden with a severely underfunded pension system and basic services.

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Politicians in Washington have so far failed to coalesce around a single bill, with the Democratic leadership pushing back against a strict oversight board that could usurp local leaders in Puerto Rico. Mr Lew said that Treasury had not yet seen the latest revisions and refused to address if he would support a veto of the bill if it didn't include some level of protection for pensioners.

"Our test is, is it a workable restructuring plan? Does it include enough of the credit to come up with a plan that can work? And are you left with a functioning commonwealth that can sustain basic services on the island? These are not bars that are unusual."

Mr Lew said: "Pensions in some cases have already been reduced. Pensions have already borne some of the burden. In the world without any restructuring, pensions are very exposed. In order for a restructuring plan to be workable, the economy of Puerto Rico has to work. There is going to have to be a balancing of creditors and those who get retirement benefits and other bills the commonwealth has to pay. If the test is [that] creditors get paid 100 per cent before anyone else gets paid anything, there is not going to be a functioning Puerto Rico."

Analysts have nonetheless warned that Congressional passage of emergency legislation may come too late to deter more lawsuits. Lobbyists have blasted the US capital with attack adverts and have targeted policymakers in their home states, characterizing the bill that would allow Puerto Rico to restructure its debt under the purview of an oversight board a "bailout".

"That doesn't mean all debt is equal. We've never said the pensions should be made senior to all debt, but there does have to be a balancing and at the end of the day you're going to have to have a functioning economy. That's why an oversight board ought to have the discretion to make the trade-off decisions," Mr Lew said.

"This is the alternative to a bailout," Mr Lew said of the Puerto Rico legislation being debated in Congress. "We have been very clear that it's not one size fits all. We understand that there is constitutional protected debt, we understand there are secured and unsecured creditors. We understand where pensions fit in the hierarchy without any legislation."

A Treasury spokesperson added that it was understood that the so-called general obligation bonds would rank above the pensions.

The default on about $400 million of obligations owed by the Government Development Bank on May 1 was in part blunted by emergency measures undertaken by the governor's office to transfer public agency accounts to commercial banks on the island.

Puerto Rico has exhausted many of those maneuvers as it stares down $2 billion of payments that come due on July 1, including about $800 million on general obligation bonds. Those bonds have a constitutional pledge and are considered the island's most senior debt.

Mr Lew, who met with Alejandro Garcia Padilla, Puerto Rico governor, on his visit — his second trip this year — added that it had become a question of whether the local government could pay for basic services.

"Before Puerto Rico can spend money to buy medications to treat children in this hospital it will have to pay bondholders or be taken to court," he said of the looming general obligation bond payments.

Earlier in the day, Mr Lew traveled to an elementary school in Rio Piedras, which has struggled with the ongoing fiscal crisis. Cafeteria workers warned that they were unable to turn some of the lights on as it began to rain, while a teacher, speaking to Mr Lew in Spanish, said the school was unable to pay to fix equipment that provides power to the classrooms.

Regarding the rhetoric of the US presidential election race, Mr Lew said: "I am not going to comment on anything that anyone is saying on the campaign trail [regarding Republican presidential candidate Donald Trump's comments on debt]. As someone who for the last three plus years has been responsible for managing our federal debt, we have the deepest most liquid market in the world for US Treasuries and that's based on the fact that for our entire history it has been a very high priority to treat the servicing of our debt as a responsibility that we have to take very, very seriously."