Emergency legislation to help Puerto Rico restructure a crippling $ 70bn debt was passed by the Senate on Wednesday, as a Friday payment deadline loomed.
The bill, which this month passed the Republican-controlled House of Representatives with unforeseen bipartisan support, had earlier on Wednesday cleared a Senate procedural vote by 68 to 32.
President Barack Obama said: “This bill is not perfect, but it is a critical first step toward economic recovery and restored hope for millions of Americans who call Puerto Rico home. I look forward to signing the bill into law.”
The Obama administration and the Puerto Rico government had lobbied for the passage of the bill, which will halt all new litigation and put in place a control board to help the US territory balance its budget and restructure its debts.
One senior creditors group applauded “the bipartisan manner in which Congress worked to craft and pass this vital legislation that puts the Commonwealth on a path to economic and fiscal health — all without imposing any cost on US taxpayers”.
Policymakers had warned that without the legislation a deluge of lawsuits could prevent Puerto Rico from funding basic services. In a letter this week to Mitch McConnell, Senate majority leader, Treasury secretary Jack Lew said the island could be forced to lay off police, close a hospital or shut down public transport if a lawsuit was successful in the absence of the emergency bill.
The $ 2bn in payments due on July 1 include roughly $ 800m to pay general obligation (GO) bondholders, considered the most senior lenders within the US commonwealth’s $ 70bn debt stock. Daniel Hanson, analyst with Height Securities, said he believed the island would be able to fund the GO bonds despite recent comments from Governor Alejandro García Padilla that Puerto Rico’s liquidity had been nearly exhausted.
In meetings in Washington on Tuesday, Mr García Padilla told policymakers the legislation was “imperfect” but necessary. The island of 3.5m people has wrestled with nearly a decade of economic decline and a 45 per cent poverty rate. Recent economic malaise has accelerated an exodus of Puerto Ricans to the US mainland, adding to the island’s problems.
Puerto Rico has already defaulted on a number of its debts, although it remains current on its GO bonds. Unlike US cities and municipalities, Puerto Rico and other territories do not have access to protections under the US bankruptcy code.
The legislation gives the island and its debt-issuing entities that right, so long as they have made “good-faith” efforts to negotiate with creditors and have received sign-off from the control board.
A local law that gave the island’s public utilities the right to restructure their debt — roughly $ 20bn of the $ 70bn of debt outstanding — was struck down by the US Supreme Court. Separately, negotiations between the island’s powerful development bank and GO creditors have stalled.
Paul Ryan, speaker of the House, said on Wednesday evening: “The legislation creates an oversight board that will institute the necessary reforms so Puerto Rico can begin to turn its economy around and get on a path to fiscal health. Congress has fulfilled our constitutional obligation.”
Additional reporting by Nicole Bullock in New York
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