Treasury Secretary Warns Senate About Looming Puerto Rico Default

People play on the beach in Puerto Rico. If the Senate passes a version of a debt restructuring bill that varies from the one already approved by the House, Puerto Rico is more likely to default this Friday. People play on the beach in Puerto Rico. If the Senate passes a version of a debt restructuring bill that varies from the one already approved by the House, Puerto Rico is more likely to default this Friday. (Photo: srietzke / Flickr)

Treasury Secretary Jack Lew urged Senate Majority Leader Mitch McConnell (R-Ky.) to advance legislation required to avoid an immediate deepening of the financial crisis in Puerto Rico.

Lew told McConnell on Monday that “the Senate should take up the matter immediately,” noting the island has $2 billion in debt payments due Friday.

“In the event of default, and if creditor lawsuits are successful, a judge could immediately order Puerto Rico to pay creditors over essential services such as health, education, and public safety,” Lew warned. He also noted that the payments due this week are “constitutionally prioritized.”

“Some well-funded creditors are working hard to delay legislative action this week,” he added, “even if it comes at the expense of the Puerto Rican people.”

The US territory is currently more than $72 billion in arrears. Though state governments have the authority to declare bankruptcy and oversee municipal debt restructuring, Puerto Rico lacks the power.

Early last month, the Puerto Rican government defaulted on a $370 million debt payment.

The House passed legislation three weeks ago that would grant the territory the ability to restructure its debt, but Democrats in the Senate have serious qualms about it.

Sen. Bernie Sanders (I-Vt.) has railed against the bill, noting it would exempt Puerto Ricans from certain minimum wage laws, while creating an appointed oversight board to weigh in on the island’s fiscal matters.

“We must never give an unelected control board the power to balance Puerto Rico’s budget on the backs of children, senior citizens, the sick and the most vulnerable people in Puerto Rico while giving the people of Puerto Rico absolutely no say at all in the process,” he remarked late last month. Sanders said the bill would “make a terrible situation even worse.”

Another prominent member of the Senate Democratic caucus to take exception to the initiative is Sen. Bob Menendez (D-N.J.). Politico reported on Monday morning that Menendez could attempt to delay the legislation until next week — after the Friday deadline.

“There’s no reason to put a [hold] on the bill,” he told the paper, if Republican leaders allow amendments during the legislative process. A “hold” on the bill would require sixty votes from senators to break.

If the Senate passes a version of the bill that varies from the one already approved by the House, Puerto Rico is more likely to default this Friday. The House is currently in recess until July 5.

The timing of this close-shave is unfortunate for federal regulators. Last week, they suddenly found themselves occupied with fresh global turmoil, after voters in Great Britain said in a referendum that they wanted to leave the European Union. Stock markets around the world reacted by shedding $2 trillion in value. The British Pound depreciated overnight by roughly 10 percent.

“We respect the decision of the voters in the UK, and will work closely with London, Brussels and our international partners to ensure continued economic stability, security and prosperity in Europe and globally,” Lew said Monday.

The Treasury Secretary has been asking Congress for months to address the financial situation in Puerto Rico. “There’s an immediate crisis in Puerto Rico. It’s not a future crisis,” he said in March, before the House Financial Services Committee.