Economic Implosion in a US Territory

Congress braces for fallout from Puerto Rico default

THE HILL
By Peter Schroeder - 04/21/16

Lawmakers are wondering what sort of turmoil they can expect in financial markets on May 1, when Puerto Rico says it will default on nearly $500 million in debt payments. Congress has pushed back its deadline for addressing Puerto Rico’s debt crisis several times. And now, with the next set of payments due in days and no legislative fix introduced even at the committee level, lawmakers appear increasingly likely to miss their May 1 goal as well. 

The missed debt payment will be the largest yet for Puerto Rico since announcing in June that it would be unable to pay back its creditors.Capitol Hill will be watching the market reaction closely. “I’m not sure that on May 2 Armageddon takes place, but clearly I think it will illustrate that there’s a serious problem,” said Natural Resources Committee Chairman Rob Bishop (R-Utah), who is managing the Puerto Rico bill in the House. “There’s still people out there who say, ‘Oh, it’s Y2K all over again.’ No, there is a problem. They will default.”

The House originally set a March 31 deadline for action on Puerto Rico legislation. That date came and went, and the talk turned to getting something done before the May 1 payment came due. Now, following a committee markup canceled at the last minute, Puerto Rico will likely have to navigate that payment without any help from Washington.The island has already suffered a series of smaller defaults as it scrambles to come up with money to pay creditors. In August, it paid a fraction of a $58 million payment. And the island suffered another missed payment at the beginning of 2016, coming up short by about $37 million.

But missing the May 1 payment would be the biggest default by far. In addition, nearly all of that payment is due from the island’s Government Development Bank, which as an agency has not yet defaulted. Those features lead some experts to argue the May default could have broader ramifications. “We have a default on May 1, I think it sets fireworks off,” said Frank Shafroth, director of the Center for State and Local Leadership at George Mason University. "There are consequences for all 50 states and cities across the country if this is not handled in a fair and effective manner.”

Shafroth argued that if Puerto Rico defaults, in part thanks to the failure of Congress to act, it could drive up the borrowing costs of other governmental borrowers, including cities and states. In turn, those municipalities would have to figure out how to balance their books when it costs more to borrow.“It has real-world consequences almost immediately,” he added. But others doubt the default will set off a chain reaction.

Many market analysts argue Puerto Rico’s debt woes are well established, and investors still holding island debt are well aware of the risks of those investments. As such, seeing Puerto Rico fail to make an expected payment should not come as much of a shock, nor would it cause panic across the municipal debt market, they argue.

“As with any default, the market will watch it. The market will be concerned about it. But I don’t think it will make a drastic change,” said James Spiotto, managing director of Chapman Strategic Advisors. Puerto Rico’s legislature passed a bill earlier this month that gives the governor the power to halt debt payments to preserve basic government services, giving the Government Development Bank some breathing room.

In Washington, lawmakers are attempting to rework a draft bill on Puerto Rico after the Natural Resources Committee scrapped consideration of the measure at the last minute amid conservative opposition. Bishop says the committee is making minor tweaks to win over members.

The bill would establish an outside fiscal oversight board on the island, and in turn give the territory the ability to seek a court-ordered restructuring of its debt if talks with creditors fail.

House staffers huddled with Obama administration officials Wednesday to discuss the bill. That same day, the Congressional Hispanic Caucus met with Speaker Paul Ryan (R-Wis.) at a meeting where Puerto Rico was a top topic of conversation.

But there is still no clear path forward, making the odds of beating the May 1 deadline extremely low. The message from GOP members and aides is that Ryan’s top priority is drafting a bill that can win broad support, as opposed to rushing something half-baked out the door. But even if missing May 1 is a foregone conclusion, there’s an even bigger, more significant payment looming. On July 1, the island has to make a $2 billion payment on its general obligation bonds, which are guaranteed by the island’s constitution.

MORE: http://thehill.com/business-a-lobbying/277067-congress-braces-for-fallout-from-puerto-rico-default