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Obama seeks broad bankruptcy power for Puerto Rico in crisis

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(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.

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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.

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“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.

Prior attempt

The bankruptcy measure, if adopted, would give Puerto Rico greater ability to negotiate, since creditors would know there’s the chance the debts could be wiped out under court supervision. The U.S. municipal bankruptcy law currently doesn’t extend to the island. Puerto Rico passed its own restructuring law in 2014, only to see it thrown out in court after bondholders sued.

Puerto Rico securities have been trading at distressed levels for more than two years as the island’s financial problems deepened. Its economy has failed to grow since 2006 and its population has dropped by at least 7 percent in the past decade as residents leave to find work. About 47 percent of islanders live in poverty, according to U.S. Census.

The plan was released ahead of the Senate hearing, where Garcia Padilla also testified. The governor said in a statement Wednesday that he supports the bankruptcy proposal and the administrations request to extend more funding to Puerto Rico, though any federal-oversight plan would need to be evaluated.

Super nine

Treasury Secretary Lew, National Economic Council Director Jeff Zients, and Health and Human Services Secretary (HHS) Sylvia Mathews Burwell said the steps are needed to revive Puerto Rico’s economy.

“The decade-long recession has taken its toll on Puerto Rico’s finances, its economy, and its people,” officials said in the statement. “To reward work and break this vicious cycle, Congress should enact proven, bipartisan tools for stimulating growth and rewarding work to people living in Puerto Rico.”

The proposal may meet resistance from many investors in the $3.7 billion municipal bond market because it could set a precedent for states with troubled finances such as Illinois and New Jersey to seek relief.

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“Including ‘super Chapter 9,’ significant new social spending, and demands for respecting Puerto Rican public sector pensions when mainland pension funds would register losses from restructuring are all a bridge too far,” said Brandon Barford, a partner at Beacon Policy Advisors LLC in Washington and a former Senate Banking Committee staffer.