Update: Puerto Rico faces defaults without law from Congress

Puerto Rican officials pleaded with US Congress in Washington, that if it does not act soon, major defaults are highly likely this spring. The officials were making their case for a law that would allow a broad restructuring of the territory's multi-billion-dollar debt, and also said they realised that any legislative help would come at a stiff price: the country would have to submit to a federal control board, which is something viewed by many in Puerto Rico as colonialist-style interference.

Yet another South American country facing debt crisis is Puerto Rico, which is expected to default on their debt by spring.

In a report from the Democrat Gazette, the country's top advisers made a case in Washington to allow restructuring of Puerto Rico's long overdue multibillion-dollar debt "at a steep price." For Puerto Rico to be allowed said restructuring, they are advised to submit to a federal control board in what many assume is a sort of "colonial-style interference" to save the country from bankruptcy.

Jim Millstein, Puerto Rico's financial adviser noted that a control board is essential, as they have already established that creditors are already suing the island for the smaller amounts of their debt. Millstein doubted that they can get enough creditors to agree on the $49 billion restructuring without a leverage that only congress can provide.

Negotiating said debt relief is a "difficult endeavor in any circumstance" as noted by Richard Cooper, Puerto Rico's representative, in the talks. However, he also said that "in the Puerto Rican circumstance, the challenge is quite enormous. That's why we've asked for a restructuring authority."

What made Puerto Rico's restructuring such a problem is the fact that they haven't been forthright in their financial numbers. Seeking Alpha said that in September, the country released a five-year plan that warned creditors it will need $14 billion of debt relief for lack of funds to pay for the $28 billion debt.

Then, in January, Puerto Rico announced that they will need a $16 billion break yet again, with $24 billion worth of reductions in the due amount of $63 billion.

At this point, the $49 billion debt that the country wants to restructure will come in the form of municipal bonds issued by 11 branches of the Puerto Rican government. Millstein predicted 11 lawsuits by creditors, saying that "The impact of five years of litigation on the economy of Puerto Rico is obvious. It would be a bad result. It would make the creditor recoveries even lower."

However, a Treasury Department official, Antonio Weiss of the Bipartisan Policy Center, agreed that restructuring should be in order. He noted, "Without the backstop of a restructuring authority, our biggest concern is that a decade of recession could become another lost decade."

The restructuring will cut $22 billion of the debt, which is not something to just write off. However, to give Puerto Rico and their bondholders some hope of recovery, two new bonds were proposed to replace the current bonds; one of them to have a fixed interest rate and a total value of $26.7 billion, and the other for payments that Puerto Rico can afford as it recovers.

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