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Puerto Rico debt crisis: PROMESA will prevent "economic cardiac arrest"

A pedestrian walks past a store that is under liquidation in the Rio Piedras neighborhood in San Juan, Puerto Rico
Erika P. Rodriguez | Bloomberg | Getty Images
A pedestrian walks past a store that is under liquidation in the Rio Piedras neighborhood in San Juan, Puerto Rico

After years of congressional hearings and public debates, the House of Representatives took constructive action last week to help address Puerto Rico's unprecedented fiscal crisis. Lawmakers passed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), a bipartisan bill that would create a federally-appointed oversight board to guide the U.S. territory's economic recovery and employ battle-tested debt restructuring principles based on nearly a century of jurisprudence.

The fate of the 3.5 million American citizens residing in Puerto Rico now shifts to the Senate, where timely passage of PROMESA is needed ahead of a looming $2 billion debt payment on July 1. The upper chamber must resist the temptation to initiate a politicized and long-winded debate on the floor. Although the bill is not perfect, it represents what the nation needs at this moment.

The reality is Puerto Rico finds itself on the verge of economic cardiac arrest following decades of contraction, population flight and excessive spending. Although some interested parties have cast this crisis as a Washington-to-Wall Street issue, it is the Puerto Rican people who have been enduring the plight of poor government accountability and a regressing social infrastructure.

As a policy advisor to institutional and retail investors holding senior bonds backed by Puerto Rico's sales tax revenues, I counsel a group that has "skin in the game" on the island and seeks to stem migration out of Puerto Rico to the mainland. That is why I have advised supporting legislation that pairs a respect for creditors' rights with a process for achieving economic stability, government reform and creating an environment for growth.

Unfortunately, unwarranted skepticism towards PROMESA slowed the bill's eventual passage in the House. Some bondholders, partisan groups and policymakers mischaracterized the bill as a "bailout" despite the fact that no federal funds will be disbursed for aid or even the oversight board. The legislation actually aims to head off a situation in which millions of Puerto Ricans need to flee to the mainland and rely on states' social welfare programs, which would itself require taxpayer money.

Another myth is that PROMESA does not support economic growth because it fails to repeal the Jones Act's shipping regulations or establish widespread exemption from the federal minimum wage. This argument ignores the oversight board's power to institute growth reforms, including the potential to cut government headcount and privatize services currently monopolized by under-performing public agencies. The bill also creates an expedited permitting procedure to slash bureaucratic red-tape and open Puerto Rico's inefficient energy sector to private investment and revitalization.

A final fallacy is that PROMESA infringes on bondholders' rights by creating a restructuring regime and proposing a stay on litigation to allow an oversight board to form. The restructuring process actually supports voluntary agreements amongst creditors, observes their respective legal rights and provides for a means to bind a minority of holdout creditors. With respect to the litigation stay, the legislation actually protects any creditors with property rights by allowing them to seek relief from the court for cause and head off irreparable harm.

It will be essential for the Senate to differentiate these facts from the many myths as it takes up PROMESA. The clear intent of the bill should empower Majority Leader Mitch McConnell to keep everyone focused on the merits of the policy, rather than the drama of the politics.

Although PROMESA should be thoroughly discussed and debated in the Senate, it must be done on an accelerated track. The American and Puerto Rican economies can ill-afford to have partisans like Senator Bernie Sanders (I-VT) delay passage by proposing unrealistic amendments and re-writes of the bill.

History will judge this Congress on how it handles the unprecedented economic quagmire in Puerto Rico. If legislators do the right thing by addressing this crisis, they will achieve major reform and help head off disruptions in the bond fund market that includes many Main Street retirement savers invest in.

For now, however, the patient is on the operating table. We must address the immediate goal of avoiding a financial and social calamity that puts millions of Americans in Puerto Rico at risk.


Commentary by Judd Gregg, a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee, and as ranking member of the Senate Appropriations Foreign Operations subcommittee. He previously served as CEO of the Securities Industry and Financial Markets Association (SIFMA). He currently advises the COFINA Senior Bondholders Ad Hoc Group, which includes GoldenTree Asset Management, Merced Capital, Tilden Park Capital Management and Whitebox Advisors.

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