The Cable

The Puerto Rico Rescue Is Going to Be a Tough Sell To Opponents

The House and White House now have to win over those opposed to providing Puerto Rico debt relief.

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Lawmakers in the House and the White House have reached a compromise agreement to rescue Puerto Rico from going broke. Whether conservatives in the House and Senate opposed to forgiving any of the island’s debt get on board remains to be seen.

Supporters are coalescing around a new bill, released late Wednesday, that provides a path to restructure the $70 billion debt load that Puerto Rican Governor Alejandro Garcia Padilla has admitted his commonwealth can’t pay.

Under the terms of the bill, a strong, yet-to-be-created oversight board would dictate how and when the island pays its bills. It also allows so-called “cramdowns,” which allow Puerto Rico to cut repayments to creditors without their consent.

The White House backs the bill, even though it doesn’t give the island Chapter 9 bankruptcy protection, which would set up an orderly legal process for creditors to get paid back some of what they lent. On Thursday, Treasury Secretary Jack Lew called the bill a “tough bipartisan compromise” but said he was pleased that the legislation includes “restructuring tools for Puerto Rico that are comprehensive and workable.”

Puerto Rico has already defaulted on some of its bonds, missing a $422 million payment earlier this month. It is facing a July 1 deadline for $2 billion in payments that it almost certainly cannot make. Municipalities in many U.S. states can seek bankruptcy protection in court. Puerto Rico isn’t eligible for this status because territories are excluded from the relevant part of the federal bankruptcy code.

On Thursday, both Republican and Democratic leaders of the U.S. House of Representatives welcomed the proposal.

“Right now, the stability of the U.S. territory is in danger, as the Puerto Rican government continues to default on major loan payments. We have insisted that our response meet basic principles, and first among them is protecting taxpayers from a bailout,”House Speaker Paul Ryan of Wisconsin said in a statement Thursday.

“After long bipartisan negotiations, we believe we have achieved a restructuring process that can work,” U.S. House Democratic Leader Nancy Pelosi added Thursday.

Not everyone is pleased with the compromised outcome, however. Wall Street creditors are likely to resist the cramdown provision, because it would allow Puerto Rico to pay back less than what it owes without objection. Former Rep. Connie Mack, a Florida Republican, has been lobbying members on behalf of creditors against it. Conservative lawmakers like Senator Orrin Hatch of Utah, the chairman of the powerful Senate Finance Committee, are also going to be tough to win over. He recently said he was not pleased with the legislation. Even Padilla has problems with the outcome; he believes the government oversight board infringes on Puerto Rican sovereignty.

But those opposed to the bill now face a stark choice: Oppose the bill and watch Puerto Rico, home to 3.5 million U.S. citizens, sink into financial ruin, or reluctantly support it. Without help from Congress, or a financial and demographic miracle, Puerto Rico is doomed.

Economic conditions there show no sign of improving, so chances that the government could eventually come up with the money it owes are slim. Puerto Rico faces a trifecta of challenges: Its government has spent irresponsibly for years; for five of the last six, it has failed to pass a balanced budget, a constitutional requirement. Its GDP hasn’t grown since 2005, floating in negative territory ever since.

And its population is shrinking, fast. According to a Pew report released Thursday, its population is 3.47 million in 2015, down 334,000 from 2000, or a 9 percent drop. Seventy-five percent of this loss has occurred since 2010. This continues the largest emigration in more than 50 years, Pew found.

There’s also a looming public health crisis there. The Centers for Disease Control and Prevention estimates that Zika will infect 20 percent of Puerto Ricans on the island by the end of 2016. The virus, which causes birth defects, is spread by mosquitoes and sexual contact. Padilla said that without help, his government would not be able to stop it.

For the island’s governor, the White House-backed bill is far from perfect. But if Padilla wants to save Puerto Rico, he might have to swallow his pride and accept it.

Photo credit: CHRISTOPHER GREGORY/Getty Images

David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis

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