Puerto Rico debt crisis "will ratchet up" if it defaults this Friday

The Puerto Rico debt crisis "will ratchet up" if it defaults on a $2bn payment due this Friday, warns US Treasury Secretary Jack Lew, and he has asked the US Senate to pass a bill addressing the Puerto Rico problem before it defaults on the payment. “If legislation doesn’t pass before 1 July, we are opening the door for vulture funds to exploit Puerto Rico,” notes United Nations debt expert Eric LeCompte, adding: “Up to now we’ve seen very little predatory behaviour, but if Puerto Rico defaults without protections, the vultures will swoop in”.

The US Senate must take immediate action to address Puerto Rico’s $70bn debt crisis, Treasury secretary Jack Lew said on Monday, days before the near bankrupt territory looks set to default on its debts once more.

In a letter addressed to Senate leadership, Lew called on Congress to pass a bill addressing the issue before the US territory defaults on a $2bn debt payment this Friday.

“On 1 July – only four days from now – the crisis in Puerto Rico will ratchet up to an even higher level. Puerto Rico has $2bn in debt payments coming due that day, including payments on constitutionally prioritized debt on which Puerto Rico has not previously defaulted,” Lew wrote.

He pointed out that the US House of Representatives already passed a bill earlier this month on 9 June that would “give Puerto Rico the tools to recover without any federal spending” and urged the Senate to vote on it “immediately”. The Senate is expected to vote on the matter this week before leaving for the 4 July holiday. If the Senate passes the bill but amends it, the House will have to vote on it again next week when it is back in session, which could be too late for Puerto Rico.

“I urge Republicans and Democrats to come together in the Senate as you have before to help our fellow citizens, and get a bipartisan bill to the President’s desk before 1 July,” Lew pleaded with the US Senate.

Others warned of what might happen if the bill did not pass before the end of the week.

“If legislation doesn’t pass before 1 July, we are opening the door for vulture funds to exploit Puerto Rico,” noted Eric LeCompte, a United Nations debt expert and the executive director of the religious development coalition Jubilee USA. “Up to now we’ve seen very little predatory behavior, but if Puerto Rico defaults without protections, the vultures will swoop in.”

Last week Lew met with Senate Democrats urging them to pass the bill, noting that Puerto Rico could not wait any longer. That same day, a group of bondholders filed a lawsuit against Puerto Rico’s government as debt negotiations fell apart.

Puerto Rico’s governor, Alejandro García Padilla, also visited Washington last week to make a case for a quick passage of the bill.

“We need the bill by 1 July. We need the bill yesterday,” García Padilla said on Thursday. He added that even if he were to shut down the government, a July default would not be averted.

“We don’t have the money for the payroll, the medical system and the healthcare system and to pay our debts. If I shut down the government on 1 July, I still don’t have enough money to pay,” he said. “It’s just a reality. We do not have the money. That’s why we’ve been saying that we will default on 1 July.”

In his letter to the Senate, Lew warned that in case of the default or a successful creditor lawsuit, Puerto Rico could be forced to pay creditors instead of using funds on health, education and public safety, which could result in laying off police and shutting down hospitals and public transportation.

“The legislation provides critical breathing space,” said LeCompte. “Before Puerto Rico’s next default, it needs the protection of this legislation. The bill in front of the Senate allows Puerto Rico to pay pensions and social services before it pays the debt.”

Last week, when the Federal Reserve chair, Janet Yellen, testified before the US Senate, US lawmakers attempted to find out if the Fed would step in at the last minute and provide Puerto Rico institutions with emergency loans as a “last resort”.

“I think our authority is extremely limited. It would not be appropriate for us to give loans to Puerto Rico. We have very limited authority to buy municipal debt and the authority we have, if we were to buy the eligible debt, I don’t think it would be helpful to Puerto Rico,” Yellen told them, before tossing the ball back in their court by saying: “This is inherently a matter for Congress and is not something that is appropriate for the Federal Reserve.”