Lawmakers butted heads over how to handle Puerto Rico’s crippling debt crisis during a Senate Judiciary Committee hearing Tuesday, with Democrats arguing the commonwealth should be extended the power to restructure its liabilities.
While the island managed to make its Dec. 1 deadline on a $354 million payment to bondholders, the commonwealth holds $72 billion in public debt — and its ability to meet its future financial obligations remains unclear.
Puerto Rico’s governor, Alejandro García Padilla, said it has “no cash left” and called on the Congress to allow the island to file for Chapter 9 bankruptcy in the way municipalities like Detroit and New York have done in the past.
“The imminence of a default when presented with the alternative between paying our creditors and providing essential government services looms large,” he said. “Absent an orderly process its effects will be catastrophic.
But Republicans disagreed, arguing bankruptcy wont fix the root of the problem or promote economic growth. GOP lawmakers condemned Puerto Rico for failing to provide audited financial statements over the course of the past two years.
“Let’s not forget that Puerto Rico issued its bonds with the knowledge that Chapter 9 bankruptcy wasn’t an option in the event of a default,”said Republican Sen. Chuck Grassley, the committee’s chairman. “Is it fair to retroactively change the rules at the expense of these investors, if other options exist for addressing Puerto Rico’s debt problems?”
Connecticut Democratic Sen. Richard Blumenthal said he believes the U.S. has a “moral responsibility” to take action.
“Congress cannot tell Puerto Rico to drop dead financially,” he said.
Former New York Lieutenant Gov. Richard Ravitch, who said he doesn’t have skin in the game, argued the island is in need of bankruptcy protection and suggested a control board be put in place.
Ravitch serves as an advisor to the bankruptcy judge in Detroit and currently sits on the boards of Build America Mutual, a monoline bond insurer, and the Volker Alliance, which provides services to countries going through restructure.
Sen. Dick Durbin, an Illinois Democrat, cited Moody’s Analytics findings the island’s debt burden stands at 40 percent while stressing the gravity of the situation.
But University of Puerto Rico finance professor Dr. Carlos A. Colón De Armas said much of the information used to calculate the commonwealth’s financial situation is flawed and the debt burden is actually closer to 16.8 percent of the budget.
“They did not include revenues from the new increased sales tax, they did not include revenues from the VAT tax that was approved and from the selected agencies that they choose to pull together for the calculation, from that group — and the revenues they elected to use — they proved allegedly that burden is 40 percent,” he said, adding the Kreuger report was not prepared at the request of the government and therefore isn’t a sound base for public policy.
Stephen Spencer, the managing director of Houlihan Lokey, argued filing for bankruptcy would be detrimental to Puerto Rico in the long run.
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