Puerto Rico Headed For Default As Congress Tackles Relief Plan
SCOTT SIMON, HOST:
Puerto Rico's financial crisis heads for another deadline and possibly a cliff on May 1 when the U.S. territory may default on a debt payment of almost $500 million. Nick Timiraos is a national economics correspondent for The Wall Street Journal and joins us in our studios. Thanks so much for being with us.
NICK TIMIRAOS: Oh, thanks for having me.
SIMON: The money just isn't there, so what happens if Congress can't agree on some kind of relief?
TIMIRAOS: Well, Puerto Rico has $70 billion that it owes creditors and there are several different classes of debts. So the missed payment that's happening this weekend is for one public agency but you're basically going to see potential cascading defaults now and so that is why Congress is stepping in here to possibly put forward some kind of restructuring legislation.
SIMON: Speaker Ryan wants something...
TIMIRAOS: Yeah, Paul Ryan has been working on this. The reason Congress is getting involved - you know, a lot of people say, well, why does Congress even have to get involved here? Puerto Rico is in a very interesting place. It's not a state, but it's not a country. So if it were a state, its municipal corporations would be able to use the federal bankruptcy code Chapter 9 the same way that Detroit did a couple of years ago to restructure its debts.
For some reason - no one's quite sure why - in 1984, the bankruptcy code was amended so that territories couldn't use it. Again, it's not a sovereign country, so they can't go to the IMF - the International Monetary Fund - the way, you know, Greece or Argentina have. So they're in this weird position here and that is why the Treasury Department and the Obama administration have said, you know, Congress, which has responsibility for Puerto Rico since it is a federal territory, needs to come up with some way for the island to restructure its debts.
SIMON: How did this happen?
TIMIRAOS: It happened over a long period of time where the governments was able to continue borrowing. And one of the reasons they were able to borrow so much, again, has to do with this kind of quirk of their political status. Puerto Rico, unlike other states, can issue triple tax-exempt bonds, which means they don't have to pay federal, state or municipal tax. And so that made these investments very attractive. And when Puerto Rico wasn't able to balance its budget year in and year out, they went and borrowed in the capital markets and they had investors lining up really to lend money to Puerto Rico.
Meanwhile, their economy has been in a recession since 2006. If you think about the worst parts of the United States - the Rust Belt - Puerto Rico's situation is every bit as dramatic, if not more so, than that and they've had tremendous population loss. It's very hard to grow your tax base to boost revenues when you're losing 1 to 2 percent of your population every year.
SIMON: What might congressional legislation look like? Do you have an inkling now?
TIMIRAOS: Yeah. So the deal that the Treasury Department and that the House leadership with Paul Ryan and they've been working on would be to pair a federal oversight board with a debt restructuring mechanism. Again, Puerto Rico can't file for bankruptcy protection, so this would create some kind of alternative bankruptcy-like mechanism for Puerto Rico to restructure its debts. A control board is of course not very popular with the local government. They'd be losing sovereignty to Washington here, but it's probably the price they're going to have to pay for being able to have some haircuts on the bonds and the bondholders are going to have to take - of course, bondholders had been fighting this. Some of them had been fighting it very hard. They've tried to characterize the legislation as a bailout, which is interesting because there actually isn't any taxpayer money being put into this. And there probably will be at some point if Congress doesn't pass legislation that allows a debt restructuring and things get worse on the island. So you could see a scenario two years from now if this isn't addressed and more people are coming into the United States and Puerto Rico really can't pay its costs (ph) then you could have, you know, you could actually have a humanitarian crisis and that could actually cost money.
SIMON: Nick Timiraos, national economics correspondent for The Wall Street Journal, thanks so much.
TIMIRAOS: Thanks for having me.
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