Puerto Rico Might Default Despite New Unelected Oversight Board

The US Senate passed the bill known by its acronym PROMESA, which translates to promise, on a bipartisan 68-30 vote, three weeks after the House overwhelmingly backed the measure. If the control board, appointed by Obama with Congressional input, can implement reforms, bring the island’s financial situation under control, and repay all of its debt, it will “enable Puerto Rico to be self-sufficient and able to sell bonds in the future for its operating and capital needs”, Dick Larkin, credit analysis director at Stoever Glass & Co. Supporters of the bill say it will allow Puerto Rico to manage its finances better, but Menendez said the bill put the island under the control of an oversight board made up of Washington appointees and no local representatives that could nullify local laws.

If Puerto Rico misses this one, it will be the first time since 1933 that a state or territory (Puerto Rico is a territory under USA law) fails to pay its general obligation bonds on time, says Cate Long, an expert on government bonds and head of the Puerto Rico Clearinghouse, a research firm.

Puerto Rico is now facing over US$72 billion of debt, due in large part to a pattern of convoluted United States policies toward the island.

That fiscal oversight board that would be created by the bill rankled many Democrats, who also objected to provisions like one that would allow the governor of Puerto Rico to lower the minimum wage for some young workers and also block workers from a new overtime rule issued by the Labor Department.

Congress just gave Puerto Rico a lifeline.

Puerto Rico’s benchmark 2035 General Obligation bond rose 1 full point in price ahead of the final vote, to trade at 66.75 points, pushing the yield down to 12.663 percent.

Ahead of the vote, Senate Majority Leader Mitch McConnell , R-Ky., addressed concerns from some that the bill would amount to a “bailout”.

Puerto Rico is in a decade-long recession and has $70 billion in debt, and leaders of both parties warned that failure to pass the bill could send the island into financial chaos.

In the case of the Puerto Rico relief bill, the compromise was worked out between Republicans and the Obama administration, led by Mr. Lew. Assured has more than $5 billion in total Puerto Rico exposure. “Otherwise we … turn them over to the hedge funds and they will sue them to death”, he said. The 7 member board, selected by President Obama from recommendations provided by party leaders in both your house and Senate, is expected to be in place by September 1, 2016.

States can permit their cities and utilities to seek bankruptcy protection under Chapter 9, yet Congress barred Puerto Rico from doing so decades ago because it is a territory. “They’ll state if a territory can get extraordinary authority from Congress, then why shouldn’t a state?” asked Republican Senator Chuck Grassley of Iowa.

But liberal Senate Democrats including Bernie Sanders, who is challenging Hillary Clinton for the Democratic presidential nomination, opposed the bill because it imposes “colonial”-style restrictions on the island including a special committee with sweeping powers”.

Passage of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) came after leaders of both political parties warned that failure to approve the legislation could lead to a USA taxpayer-funded bailout. Sanders blasted this as “colonialism at its worst”.