Senate Pulls Puerto Rico Back From the Brink of Fiscal Ruin

The Senate just threw Puerto Rico a desperately needed lifeline.

Two days ahead of a $2 billion payment owed by the U.S. commonwealth — a bill that San Juan admittedly can’t pay — lawmakers in the upper house cleared the way for rescue legislation that opens a path for an orderly restructuring of the island’s $72 billion in bond debt. It also creates a new federally appointed fiscal oversight board that will oversee the island’s finances. The bill passed by a vote of 68 to 32.

The bill, known as the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA, already passed the House earlier this month. President Barack Obama has indicated he would sign it, meaning a crisis that risked driving a U.S. territory into an uncharted fiscal crisis may be nearing an end.

“Obviously, the bill isn’t perfect,” Senate Majority Leader Mitch McConnell (R-Ky.) said Wednesday. “But here’s why we should support it: It won’t cost taxpayers a dime; it prevents a bailout; and it offers Puerto Rico the best chance to return to financial stability and economic growth over the long term so we can help prevent another financial crisis like this in the future.”

The bill’s future was in doubt earlier this week, and had Wednesday’s vote failed, Puerto Rico would have defaulted yet again. If the island were to fail to pay back all of its debt, it would be the largest default in the history of municipal bonds, which would hit both institutional investors and ordinary Americans. Puerto Rico’s bonds are popular in mutual funds because they are tax free.  

Both Treasury Secretary Jack Lew and Puerto Rico Gov. Alejandro García Padilla have been lobbying hard for the legislation. On Tuesday, Lew huddled with members of the Senate Finance Committee to win over skeptical lawmakers.

“The risks of Puerto Rico descending into chaos are very real, and the alternative is action,” Lew said after the meeting. “It is a choice between something that works and something that would just be a terrible ordeal for the 3.5 million Americans who are Puerto Rican citizens and American citizens.

For his part, Padilla called the law “imperfect” but that it does provide  “an orderly debt restructuring process and a real opportunity of negotiation with creditors.”

Not everyone is pleased with the bill. In Puerto Rico, there are concerns that the fiscal oversight board could infringe on the island’s sovereignty. But faced with choice between financial ruin and a rescue, Padilla is forced to chose the latter.

Photo credit: CHRISTOPHER GREGORY/Getty Images