(Bloomberg) — President Barack 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 late 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.
“Most fundamentally, the debt is unsustainable, and the market knows this,” Antonio Weiss, counselor to U.S. Treasury Secretary Jacob J. Lew, said during testimony Thursday at a Senate hearing on Puerto Rico’s finances.
The proposals suggest the crisis has reached a point where federal officials, who had vowed not to extend a financial bailout, can’t wait for the commonwealth and creditors to work out a compromise after talks broken down Wednesday. The proposals are likely to face resistance in Congress, where Republicans have blocked a bill that would extend more limited bankruptcy powers to the island.
These changes “are going to be extremely hard to get through both the U.S. Congress and the Puerto Rican legislature,” said Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics. “This is a Congress that gets almost nothing done. So to expect them to get something controversial done at the request of the administration right before an election is difficult.”
Puerto Rico is teetering under debt amassed from years of borrowing as the economy failed to grow and residents left for the U.S. mainland. Gov. Alejandro Garcia Padilla is seeking to persuade investors to accept less than they’re owed, saying tax increases and spending cuts alone won’t be sufficient to eliminate the government’s budget shortfalls.
Negotiations fell apart between Puerto Rico’s Government Development Bank, which oversees the island’s borrowing, and some bondholders regarding a debt-exchange that would have provided it with cash to help cover a Dec. 1 bond payment. The commonwealth has $720 million of bonds payments due in December and January.