"Puerto Rico is not Greece"... but it increasingly looks like it will be in a few weeks, thanks to US taxpayers who are about to foot the bill for yet another creditor bailout.
As we reported last night [9], creditors of the insolvent commonwealth, hoping to get a bailout and the highest possible return on their bond investment courtesy of the US taxpayer, have been pushing to portray the fiscal situation in Puerto Rico as beyond repair, hoping to force the administration and Congress to act. As The NY Times reported, on Wednesday, Puerto Rico took the unusual step of announcing that talks over restructuring about $750 million of the island’s debt had broken off, a move that some creditors saw as posturing to Washington for help.
Then, all day today, Puerto Rico's leadership, realizing its interests are suddenly alligned with those of its creditors as a bailout is in everyone's best interest, took the rhetoric up a notch when the island’s Governor Alejandro Garcia Padilla said in written testimony for Senate Energy Committee that Puerto Rico will have negative cash balance of $29.8 million in November 2015, and then added that the Puerto Rico Government Development Bank may be unable to make its $355 million debt service. "These GDB bonds are supported by a guarantee from the Commonwealth, and the GDB, which faces its own liquidity crisis, is not expected to be able to make the payment on its own based on current information."
Others quickly chimed in: Puerto Rico Senate President Eduardo Bhatia said he would be in favor of "including everything" in a broad, comprehensive restructuring of the debt.
In short: bail us out now or face the consequences of a domino effect of defaults which puts not only the creditors, but the island itself, in dire straits.
The gambit is working. As we reported yesterday citing Bloomberg, "Obama is pressing for Congress to give Puerto Rico sweeping powers to reduce its $73 billion debt burden through bankruptcy, escalating administration involvement as the Caribbean island’s access to cash dries up."
Puerto Rico would be provided with a form of bankruptcy protection not now available to American territories. Administration officials also called for lawmakers on Wednesday to increase health-care funding for Puerto Rico, extend tax credits to the poor and put independent oversight in place to monitor the government’s budget.
While Republican opposition to a broad bailout has been the base case, even that has been melting away in recent days: Bloomberg adds that the Republican leadership would be willing to grant Puerto Rico access to the bankruptcy courts only on a limited basis, and only with strings attached like the imposition of a federal “control board” to oversee the island’s finances.
Control boards have been used in cases of severe municipal distress to take the power to spend public money out of the hands of elected officials. They do not generally have the powers that bankruptcy judges do to abrogate contracts, such as labor contracts and promises to repay debt.
Or largely a technicality, one which would make Puerto Rico a comp to Greece, a "sovereign state" which is now de facto controlled out of Frankfurt and Brussels. Only in the case of Puerto Rico it would be the US taxpayers that are on the hook.
So with the framework for the bailout largely in place, there is just one thing missing: the trigger that will push the last holdouts to agree.
Luckily one already exist: the same one used to force the bailout of the banking system in 2008: an appeal to emotions, and a threat of dire consequences, unless a few conflicted parties get their way.
This is precisely what happened today when as Reuters reports [10] Treasury Secretary counselor Antonio Weiss warned that Puerto Rico faces a humanitarian crisis without federal action, as he appealed to Congress to help the debt-ridden U.S. territory, in comments to a Senate committee hearing on Thursday.
In other words, bail out Puerto Rico or watch the island go up in a cloud or violent riots. But please, whatever you do, don't call it a bailout: "Weiss said that without action by Congress, Puerto Rico's crisis would escalate and reiterated that the Obama administration's policies were "not a bailout" for the island."
Which, naturally, is the spin that the holdout Republicans should use to justify their action before their voters: bail Puerto Rico out... just don't call it a bailout.
The rest is already known: he repeated the key points of a plan released by the Treasury on Wednesday, saying Congress should provide tools for Puerto Rico to restructure its liabilities, increase Medicaid support and boost economic growth through tax credits. Again: it's "not a bailout."
A key element of Treasury's proposal is its endorsement of extending bankruptcy protections not only to Puerto Rico's public agencies, but to the island's government itself - a notion championed by some Puerto Rican leaders but seen as too radical to be politically practical.
Cities, towns and municipal agencies can file for under the U.S. Chapter 9 bankruptcy code, while states cannot. Puerto Rico is exempt from Chapter 9 because it is a commonwealth.
And just in case it was lost, here it is again: "Bankruptcy is not a bailout," Weiss said, according to testimony released ahead of his remarks. "Allowing Puerto Rico to resolve its liabilities under the supervision of a bankruptcy court involves no federal financial assistance whatsoever. Instead, bankruptcy requires shared sacrifice from both Puerto Rico and its creditors."
What he forgot to add is that with both Puerto Rico and its creditors being made whole on their bonds, and getting a backstop from the government, nothing will change, and the only sacrifice, very much unshared, will be by the usual patsy - US taxpayers.
