Treasury Secretary Jacob Lew said Tuesday the Obama
administration isn't contemplating a federal bailout for Puerto
Rico as the island territory faces a cash crunch, but he offered
the administration's most explicit call yet for Congress to revise
bankruptcy rules and facilitate debt restructuring for the
commonwealth.
Mr. Lew, responding to a series of questions submitted earlier
this month by Senate Finance Committee Chairman Orrin Hatch (R.,
Utah), warned that Puerto Rico's yearslong economic contraction
would worsen without access to chapter 9 of the U.S. bankruptcy
code.
"Puerto Rico's fiscal situation is urgent, and I believe it
requires the immediate attention of Congress," Mr. Lew said.
Without an established legal option to restructure debts, the
outcome would be "chaotic, protracted and costly both for Puerto
Rico and more broadly for the United States," he said.
As a territory, Puerto Rico isn't able to restructure the debt
of its public corporations through bankruptcy, a path available to
municipalities in U.S. states. Federal courts have overturned a
local law designed to create a similar path to bankruptcy.
The territory's governor said last month that Puerto Rico's
debts, which with various municipal authorities total more than $72
billion, cannot be repaid. Officials are currently in talks with
creditors over potential restructuring.
Legislation has been introduced in Congress to grant access to
chapter 9 for Puerto Rico's public authorities. But it hasn't moved
anywhere amid opposition from hedge funds and other bondholders
that could face losses. They say the change would unfairly rewrite
contracts.
Mr. Lew said the alternative to a bankruptcy-code change would
be much worse. "An untested and potentially disruptive process with
numerous creditor lawsuits and years of litigation would depress
the local economy, increase costs and make long-term recovery
harder to achieve," he wrote.
Granting Puerto Rico access to restructure its debts under the
watch of a bankruptcy judge "involves no federal financial
assistance and is in no way a federal bailout," Mr. Lew said.
Mr. Lew didn't outline any new steps that the administration was
taking. Over the past year, Treasury officials have focused their
efforts on ensuring Puerto Rico gains access to available federal
programs.
The Treasury Department said separately that Mr. Lew met Tuesday
with Puerto Rico's governor, Alejandro Garcia Padilla, to receive
an update on its financial situation. Mr. Lew "said he would
continue to work with Congress to build bipartisan support for a
legal framework that helps Puerto Rico resolve its financial
challenges," a Treasury spokesman said.
Puerto Rico has run up sizable debts in recent years, aided by
the power to issue bonds that aren't subject to federal, state and
local taxes. Its tax base has eroded as residents, who are American
citizens, have migrated to the U.S. mainland in search of jobs.
The island's economy faces deep structural problems, including a
much lower rate of labor-force participation than in the U.S. and a
poor business climate marred by high transportation and electricity
costs. Mr. Lew said any effort to boost the island's economy needed
to begin with a long-term, comprehensive fiscal plan that address
those challenges
Write to Nick Timiraos at nick.timiraos@wsj.com
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