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Puerto Rico passes emergency law allowing a halt on debt payments

The move shields public services, pressures Congress, and may face lawsuit

Jule Pattison-Gordon

Puerto Rican Governor Alejandro García Padilla made a bold move amidst Puerto Rico’s debt crisis last week. Padilla signed a bill that declares Puerto Rico in a state of emergency and authorizes him, at his discretion, to suspend debt payments until Jan. 2017 to protect the well-being of residents.

According to the bill, Padilla may “protect the health, security and public welfare … [by] using government funds first and foremost for public services.”

The move, some say, is sure to be challenged by hedge funds, which own much of the debt. It also cranks up the pressure on U.S. Congress to find a resolution to an economic disaster that is risking the safety of the island’s citizens.

The measure comes as Puerto Rico has been struggling to balance repayments on $72 billion of debt with the funding needs of hospitals, schools and basic public services. Meanwhile, mass emigration continues to deplete the government’s tax revenue.

Last minute scramble

Just before the law raced through the legislature, some hedge funds seemed to fear their money was slipping away.

On Monday, April 4, days before the governor signed the bill, a group of hedge funds filed a complaint with the U.S. District Court in San Juan seeking to block the Government Development Bank from spending too much to meet its next debt payment.

The complaint asked the court to prohibit the GDB from making any cash transfers not strictly necessary for basic operating expenses — such as paying bank employees’ wages — or providing public services critical to public safety. The GDB has a $422 million payment due on May 1. According to the version of the emergency declaration bill passed by the Senate on April 5, the bank has only $562 million left in cash.

Panic had risen over the solvency of the GDB, said Deepak Lamba-Nieves, research director at the Center for the New Economy in San Juan, in a phone interview with the Banner. Mayors and public officials began taking more money out of the bank to ensure they could pay suppliers and their employees, which in turn depleted what funds the bank had for paying creditors.

Lamba-Nieves said that while the hedge funds had legitimate claims to payment by GDB, if their request to halt the bank’s spending was granted, the result could be disastrous.

“Freezing [the GDB’s] accounts limits the ability of mayors and certain public officers to make payments to suppliers and pay their employees, and would trigger catastrophe at local level and in public agencies,” he said.

With the hedge funds’ complaint filed on Monday April 4, the Senate passed the emergency bill at 2:30 a.m. on Tueday. The House spent a day in heavy debate, before squeaking through on Wednesday morning a revised bill that gave the governor power to suspend payments on a case-by-case basis.

Looming lawsuit?

Angelo Falcón, president of the National Institute for Latino Policy, told the Banner that the significance of the emergency law rests in how the hedge funds respond. He noted that the Puerto Rican constitution requires the government to prioritize repaying general obligation bonds, which hedge funds may take as grounds to sue.

“It really depends on actions of creditors,” Falcón said last week. “Are they going to take it to court? See it as a hard line they’re going to take? Is this going to get them to negotiate? It’s hard to tell at this point.”

“What it is going to do is trigger a lot of litigation [by the hedge funds],” he added.

Emergency state

Lamba-Nieves said the emergency law brings other concerns as well: CNE interprets it as granting Puerto Rico’s executive branch greater powers to make financial and economic decisions for specific agencies, without going through the normal legislative process.

“[With this law,] you protect the people, but in doing so you’re taking away some constitutional rights,” he said. “It gives a lot of power to the governor to make economic and fiscal decisions on the behalf of the people of Puerto Rico. … A very broad series of powers area allotted to the governor.”

This raises two worries, he said: The executive branch’s power is greatly expanded, and a lot of financial decisions are put in the hands of the Padilla, who, Lamba-Nieves said, may not have the fiscal expertise to make the best choices.

Eyes on Congress

Lamba-Nieves said the emergency law could buy Puerto Ricans a temporary reprieve, but does not solve the island’s issues. The law’s larger effect may be pressuring Congress, which has not granted Puerto Rico’s request for bankruptcy powers that would allow it to restructure its debt.

“This bill probably buys a little bit of time for the governor and also pushes Congress’s hand in regards to passing a bill that ultimately addresses restructuring the public debt of Puerto Rico,” Lamba-Nieves said.

Falcón agreed that the territory needs bankruptcy powers.

“[The law]’s just an indication that, without the formal bankruptcy protection that they’ve been asking for from the U.S. Congress, it becomes a legal and economic mess for Puerto Rico,” Falcón said.

Oversight proposal

At the end of March, Republicans in the House Natural Resources Committee proposed a five-member oversight board with wide-reaching controls over Puerto Rico’s finances, but with only one member required to be from Puerto Rico. With the authority granted to it, the board could take actions such as privatizing government services, reducing minimum wage and rejecting budgets and proposed laws.

The proposed oversight board evoked outcry from many Puerto Rican leaders, including former governor Anibal Acevedo Vilá, who regard it as seizing too much power from the Puerto Rican government.

“Its real name should be the Omnipresent, Dictatorial and Colonial Board,” Acevedo Vilá said, according to the New York Daily News.

According to NPR, some creditor groups also objected to the proposed oversight board out of fear that it could result in the imposition of unfavorable repayment conditions.

CNE released a set of policy recommendations for Congress that included the call for systemic change and medium- and long-term strategies for the island’s economic growth.

“If Congress wants to avoid facing the same predicament in five or ten years, any solution crafted in the current juncture must ensure the long-term transformation of the island’s fiscal and development infrastructure and have the support of diverse stakeholders in Puerto Rico,” the document reads.

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