On Wednesday, Congress approved a bill to rescue Puerto Rico’s finances, only two days before the U.S. territory’s deadline on a $2 billion payment. But Governor Alejandro Garcia Padilla declared that the island would still not be able to pay bondholders.
“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,” he wrote on CNBC’s website.
Puerto Rico is in deep financial trouble; as Law Street previously reported, the island is $72 billion in debt, and is due to pay a big chunk of it this week. It has already defaulted on previous payments, but the payment due on Friday includes about $780 million of General Obligation bonds, which are the most important and supposed to be paid off first.
Since the island is not expected to make that deadline, this would be its first default of GO bonds, which it is bound to pay according to its constitution. The White House has expressed warnings that unless the U.S. steps in and helps, the island could face a possible humanitarian crisis and complete financial chaos. Since Puerto Rico is not a U.S. state but a territory, it can’t file for bankruptcy, which would allow it to restructure their debt.
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The bill that was voted through, called the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), will provide protection from any creditor litigations that could be brought to the Puerto Rican government. It will also put together a control board that will supervise restructuring of debts and finances. Both Republicans and Democrats unanimously supported it.
“If we don’t act before the island misses a critical debt payment deadline this Friday, matters will only get worse — for Puerto Rico and for taxpayers,” said Senate Majority Leader Mitch McConnell.
And President Obama said “This bill is not perfect, but it is a critical first step toward economic recovery and restored hope for millions of Americans who call Puerto Rico home.”
Puerto Rico’s Governor Padilla has mixed feelings about PROMESA, and wrote in a commentary on CNBC:
PROMESA is a mixed bag. On the one hand, it provides the tools needed to protect the people of Puerto Rico from disorderly actions taken by the creditors. The immediate stay granted by the bill on all litigation is of the utmost importance in this moment. Most importantly, the authority to adjust our debt stock provides the legal tools to complete a broad restructuring and route Puerto Rico’s revitalization.
On the other hand, PROMESA has its downsides. It creates an oversight board that unnecessarily undercuts the democratic institution of the Commonwealth of Puerto Rico. But facing the upsides and downsides of the bill, it gives Puerto Rico no true choice at this point in time.
The bill will provide some hope for the people of Puerto Rico. Thousands have already fled their homes on the island, while hospitals can’t treat patients without advance cash payments. Obama has promised to sign the new bill before July 1.