Treasury Secretary Jacob Lew used a trip to Puerto Rico on Monday to warn that a spiraling debt crisis could send the island’s already moribund economy into a tailspin.
The trip, intended to prod Congress to act ahead of larger defaults this summer, included stops at the island’s largest hospital, an elementary school and a business district pockmarked with vacant storefronts. Authorities worry that continued migration of Puerto Ricans, who are U.S. citizens, to the American mainland will chip away at the island’s economy.
Mr. Lew’s main audience was back in Washington, where lawmakers are finalizing legislation this week pushed by House Speaker Paul Ryan (R., Wis.) to allow Puerto Rico some authority to restructure its nearly $70 billion in debt. The legislation would also create a federal oversight board to ensure local compliance with balanced-budget standards.
Puerto Rico has been mired in a recession for a decade and borrowed heavily as revenue consistently fell short of forecasts. Despite the shaky economy, investors snapped up its debt for years thanks to generous tax incentives. The borrowing spree plugged annual deficits but did little to create economic opportunity on the island.
Some bondholders have said the Treasury is exaggerating the risks of a humanitarian crisis by pointing to some of the island’s bustling shopping centers and beautiful beachfronts.
Monday’s trip painted a different picture. Mr. Lew also toured an elementary school where teachers told him they can’t turn on the lights in the cafeteria when it rains. Many schools can’t afford screens for windows or cleaning of septic tanks, hampering mosquito-abatement efforts that are critical to preventing the spread of the Zika virus.
Funding shortfalls and delayed payments from the government to suppliers have been particularly acute in the health-care sector. By some estimates, Puerto Rico is losing more than one doctor per day. Hospitals across the island have had to shut down wings and cut workers’ pay or lay them off altogether as insurance providers face long waits for government reimbursements.
Zika will test Puerto Rico’s fragile public-health infrastructure and could leave its hotels and restaurants reeling if tourists stay away. Last week, Major League Baseball said it would move games scheduled in San Juan later this month to Miami after players raised concerns about traveling to Puerto Rico due to Zika.
Because Puerto Rico is not a state, its municipalities and public corporations can’t file for bankruptcy protection, and because it is not a country, it can’t seek assistance from the International Monetary Fund. Puerto Rico not only faces a large debt load, but its pension system also has more than $40 billion in unfunded obligations and is likely to exhaust its reserves later this decade.
Puerto Rico Gov. Alejandro García Padílla warned that without the tools to restructure its debt, Puerto Rico would ultimately need taxpayer assistance. “If Congress does not act, then we will need a bailout, and it will be very expensive for US taxpayers,” he told reporters while touring an elementary school.
House Republicans are preparing to reintroduce legislation Wednesday that has been the product of unusually bipartisan negotiations between both parties and the Treasury Department. Some bondholders have objected strongly to provisions that would force them to accept upfront losses on debts by allowing debts to be written down.
Mr. Lew said Monday that advertisements attacking the bill as a “bailout” were deceptive and had crossed a line because the bill puts no taxpayer dollars at risk.
GOP leaders scrapped a series of initial votes on the bill last month after some lawmakers raised similar concerns. “There is a group in the Republican conference that doesn’t want to touch this at all out of fear for whatever comes next,” said Rep. Mick Mulvaney (R., S.C.).
While Republicans have tried to rally the conference behind a bill, conservatives remain skeptical have raised concerns it might elevate the standing of pensioners ahead of bondholders.
By Nick Timiraos Treasury Secretary Jacob Lew Tours Puerto Rico to Urge Action in Congress
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